Wilful defaulters face Sebi, RBI heat as bad loans threaten to derail banking system

MUMBAI: The government and financial regulators appear to have declared war on wilful defaulters as a rising tide of bad loans threaten to derail the banking system and condemn banks, especially state-owned ones, to months of piffling or modest growth.

The Securities and Exchange Board of India may bar wilful defaulters from raising equity as part of a series of measures aimed at deterring promoters from defaulting on payments even when they have money.

Sebi is reviewing rules governing a "fit and proper" person and those "eligible" to raise money via a public issue. It may bring wilful defaulters under ambit of these rules, said a top official familiar with the development said.

While the capital markets watchdog is still formulating its policy, the Reserve Bank of India has already moved to tighten its own rules on such defaulters. Group companies who have failed to honour guarantees provided to a defaulting company within the group can also be classified as a wilful defaulter, the regulator said on its website on Tuesday.

It added that such defaults should cover all kinds of companies and business enterprises whether incorporated or not and that banks and financial institutions should report the names of directors responsible for management in case of default of business enterprises.
The Indian banking system has been rocked by corporate defaults and rising cases of bad loans as growth slipped to a decade low last year and projects were held up due to red tape and environmental issues. Gross bad loans as a percentage of advances fell marginally in Jan-March 2014 to 4.2% but the levels of stress in the banking system continue to be high. Stressed advances of commercial banks was close to double digits in the March 2014 quarter and reports of large accounts going bad or needing rescue in recent months only appear to indicate a further worsening of the situation.

Banks were forced to step in and order a forensic audit at New Delhi-based Bhushan Steel after its vice-chairman and managing director Neeraj Singhal was arrested last month on an alleged case of bribery. Bhushan has not defaulted on its loans of Rs 40,000 crore but the arrest has cast doubts about its ability to repay loans.

A few weeks later, Kolkata-based United Bank of India declared Vijay Mallya, chairman of the UB group, as a wilful defaulter after Kingfisher Airlines promoted by his group failed to repay loans and folded up in 2013. Other banks like IDBI, Axis Bank are likely to follow UBI's lead. But the battle against defaults had begun months ago in 2012-13 as NPAs began to rise.