08-June-2024-Editorial

WILFUL DEFAULTER 

Wilful defaulters are borrowers who intentionally fail to repay their debts despite having the financial capacity to do so. To prevent these individuals from escaping legal and financial consequences, various measures such as Look-Out Circulars (LOCs) are employed.  

                              

Look-Out Circular (LOC) 

LOC is a notice to prevent individuals wanted by authorities or banks from leaving or entering the country through designated ports (land, air, sea). 

Responsible Agency: 

• Bureau of Immigration under the Ministry of Home Affairs manages LOCs at 112 immigration check posts across India. 

Who Can Issue LOCs 

Authorized Agencies: 

• Central Bureau of Investigation (CBI) 
• Enforcement Directorate (ED) 
• Directorate of Revenue Intelligence (DRI) 
• Income Tax Department 
• State Police and Intelligence Agencies 

Issuing Authority: 

• Officers not below the rank of District Magistrate, Superintendent of Police, or Deputy Secretary in the Union Government. 

Modification and Validity of LOCs 

• Modification: LOC can be modified, deleted, or withdrawn only by the issuing authority. 
• Validity: LOC remains valid for up to 12 months unless renewed by the issuing agency. 

Power of Public Sector Banks (PSBs) to Issue LOCs 

Historical Context: 

• Since 2018, PSBs could issue LOCs against individuals potentially harming economic interests. 

Recent Ruling: 

• Bombay High Court ruled that PSBs cannot issue LOCs against alleged loan defaulters, deeming it a violation of fundamental rights without a legal statute. 

Who are Wilful Defaulters? 

Definition by RBI: 

Borrowers who: 

• Deliberately avoid paying dues despite having funds. 
• Divert loan funds for other purposes. 
• Syphon off funds making them unavailable for repayment. 

Thresholds: 

• Minimum loan amount to be considered a wilful defaulter: Rs 25 lakh. 
• Large defaulters: Borrowers with outstanding balances of Rs 1 crore or more, classified as doubtful or a loss. 

Economic Implications of Wilful Defaulters 

Impact on Credit Market: 

• Liquidity Constraints: Wilful defaulters face difficulties in obtaining new loans. 
• Market Reputation: Being labelled a wilful defaulter damages the borrower’s ability to raise capital. 

Statistics: 

• As of December 2023, 17,713 accounts with loans of Rs 353,129 crore were categorized as wilful defaults. 

Impact on Equity Markets and IPOs: 

• SEBI Restrictions: Companies with wilful defaulters are barred from launching IPOs or issuing equity shares, affecting growth prospects and investor confidence. 

Insolvency and Bankruptcy Code (IBC): 

• Exclusion from Resolution Plans: Wilful defaulters cannot submit resolution plans for companies they defaulted on, preventing moral hazards and encouraging responsible borrowing. 

NPA Accumulation: 

• Wilful defaults increase Non-Performing Assets (NPAs), reducing bank profits and affecting the economy. 

Preventive Measures for Banks 

Debt Recovery Tribunals (DRTs): 

• Fast-track loan recovery mechanism under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. 

IBC & National Company Law Tribunal (NCLT): 

• Time-limited framework for resolving insolvency and recovering debt. As of March 2023, the Insolvency and Bankruptcy Board of India reported a resolution value of Rs 8.3 lakh crore achieved through IBC cases. 

SARFAESI Act, 2002: 

• Empowers banks to take possession of secured assets like land and buildings without lengthy court procedures, deterring defaults by making consequences more immediate. 

Reserve Bank of India (RBI) Guidelines: 

• KYC Guidelines: Require detailed borrower information to identify financial risks. 
• Anti-Money Laundering Provisions: Help detect potential money laundering schemes, preventing loans to those planning to default. 

Legal Action and Blacklisting: 

• Initiate criminal proceedings against wilful defaulters. 
• Blacklisting defaulters makes future loans or investments difficult, discouraging intentional defaults. 

Conclusion 

Wilful defaulters pose significant challenges to the banking sector and economy. LOCs serve as a critical tool to prevent these individuals from evading accountability. However, legal rulings such as those from the Bombay High Court highlight the need for clear statutory authority. Effective preventive measures, including robust loan recovery mechanisms and stringent regulatory guidelines, are essential in mitigating the impact of wilful defaulters and safeguarding economic stability.