ET in the Classroom: Damages of a wilful defaulter stamp

With PSBs such as SBI and PNB having a harrowing time recovering Rs 9,000-crore dues from Kingfisher Airlines and its promoter Vijay Mallya, the term 'wilful defaulter' has become the darling of prime time news. Last year, the government had said wilful defaulters owe Rs 64,300 crore to state-owned banks
1. Who is a wilful defaulter? A company can be classified as wilful defaulter when it fails to repay loans even when it has the capacity to honour it, or when it diverts funds for purposes other than for which the loan was disbursed, or when assets which were used as guarantees are sold off without the prior knowledge of the bank.

2. How are they identified? The Reserve Bank of India (RBI) advocates a two-committee screening process for identifying a wilful defaulter. The first committee would examine if the borrower can be classified as a wilful defaulter. If so, a show cause notice is issued to the borrower. After giving a hearing the borrower, the committee would justify their reasons. The second com mittee, headed by an MD or a chairperson of the bank, would look into the first committee's findings and issue the final order.

The RBI rule says that only the whole time direc tors and directors who had been party to the diversion of funds can be held liable for the default.

3. What is the main purpose of identifying a wilful defaulter? The aim is to disseminate credit information regarding a wilful defaulter, so that he is unable to secure credit from any other financial institution or bank. Further once identified, a wilful defaulter's name along with all his address details and photograph is usually published in newspapers and websites so that they can be publicly shamed.

4. How does it affect the borrower's business? If an individual is termed 'wilful defaulter', not only his company's assets are frozen but his access to funding gets restricted.Further if that person is present on the board of any other company , that company also gets prohibited from getting loans from banks or raising funds through equities.

5. What actions can a bank take in case of a wilful default? In case of diversion of funds with malafide intentions, banks can initiate criminal proceedings against the wilful defaulter. Banks can also take other legal actions such as selling of their assets secured to them.

6. What banks can do to prevent? Banks should monitor the end use of the funds and initiate prompt action in case of misuse of funds. Further, banks are required to inform Equifax, Experian, CRIF High Mark and CIBIL about all cases identified as wilful defaulters.They need to disseminate the information on their websites. It should also submit the quarterly list of wilful defaulters where suits have not been filed to the RBI.