Post Supreme Court ruling, banks turn wary of declaring accounts as 'wilful default'
Aug 8, 2023
Synopsis
Indian banks have refrained from declaring overdue loan accounts as fraud as the Supreme Court’s decisions make it obligatory for lenders to provide borrowers an opportunity to represent themselves before naming accounts as fraud. The lenders have made provisions instead of declaring accounts as wilful defaults. The RBI has sought comments from banks on legal and operational issues on the common detection mechanism of wilful defaulters.
Indian banks have been wary of declaring overdue loan accounts as fraud over lack of clarity following the Supreme Court's decision that made it mandatory for lenders to give borrowers a chance to represent themselves before declaring the account as fraud.
According to two senior bank executives, most lenders have not declared any accounts fraudulent after the SC judgement in March. The issue was discussed in a meeting of bankers last month after the Reserve Bank of India sought views from lenders on a common mechanism for declaring accounts as "wilful default".
"The RBI has sought comments from banks on legal and operational issues and the need for a common mechanism for identification of wilful defaulters," said one of the bank executives, adding that the central bank sought comments after it received representation from industry bodies on the issues faced by borrowers as a part of consortium lending.
He said most banks are not going ahead with declaring accounts as wilful default but are making provisions for the same. "There is a fear of litigation. What if a borrower says he was not given adequate representation? Also, every bank has its own process, which makes it more difficult in cases of multiple banking loans," he said.
The second executive aware of the developments said the issue will be taken up at the level of the Indian Banks Association, or IBA, as this impacts both private and state-run banks.
"The RBI should come up with a clarification, in which case all lenders can follow a standard operating procedure," he said.
Earlier, lenders had represented to the Reserve Bank to defer its circular concerning the settlement of fraud or wilful default cases by at least six months.
After issuing the 'Framework for Compromise Settlements and Technical Write-off' circular on June 9, the banking regulator came out with an explainer, stating that the provision enabling banks to sign compromise settlements in respect of borrowers categorised as fraud or wilful defaulters was not a new regulatory instruction. It had been the settled regulatory stance for more than 15 years, it said.
Bankers are wary of their decisions being questioned by vigilance and investigation agencies later, and want some assurance from the regulator on this count before the implementation of the circular.
Last week, the government informed the Lok Sabha that, as per RBI provisional data, gross NPAs of scheduled commercial banks have declined in the last six financial years from ₹10,36,187 crore (gross NPA ratio of 11.18%) as of March 2018 to ₹5,71,515 crore (gross NPA ratio of 3.87%) as of March 2023.
[The Economic Times]
