Monday, August 3, 2015

WILFUL DEFAULTERS



Guidelines on Wilful Defaulters

Definitions of ‘Lender’, ‘Unit’ and ‘wilful default’
Lender: All banks / FIs to which any amount is due with respect to a banking transaction including derivatives, guarantees and letters of credit.

Unit: Individuals, juristic persons and all other forms of business enterprises. In case of business enterprises, bank may also report the names of persons in charge and responsible for its management.

Wilful Default: A ‘wilful default’ would be deemed to have occurred when:

(a)  The unit has defaulted in its payment obligations even when it has the capacity to do so.

(b)  The unit has defaulted in its payment obligations and has not utilised the finance for the purposes for which it was availed but has diverted the funds for other purposes.

(c)    The unit has defaulted in its payment obligations and has siphoned off the funds and  the fund is no longer available with the unit in the form of other assets.

(d)  The unit has defaulted in its payment obligations and has also disposed off the assets given for the purpose of securing a loan without the knowledge of the lender.

The identification of the wilful default should not be decided simply on the basis of an isolated incident. The categorisation must be intentional, deliberate and calculated.

Diversion and siphoning of funds
Diversion of Funds: The term ‘diversion of funds’ include any one of the following:

(a)    utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;

(b)  deploying borrowed funds for creation of assets not referred to in the sanction;

(c)    transferring borrowed funds to subsidiaries, Group companies or other corporates;

(d)   routing of funds through any bank other than the lender bank without prior permission;

(e)   investment in other companies without approval of lenders;

(f)  shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn.

Siphoning of Funds: The term ‘siphoning of funds’ occurs when borrowed funds are utilised for purposes not related to the operations of the borrower and is detrimental to the financial health of the entity or the lender.

Cut-off Limits
The penal measures would be applicable to all willful defaulters. However, keeping in view the CVC guidelines in the matter, only the wilful defaulter with an outstanding balance of Rs.25 lakh or more, would attract penal measures. This limit of Rs.25 lakh may also be applied for the purpose of taking cognisance of siphoning / diversion of funds.

End-Use of Funds
In cases of project financing, the banks ensure end use of funds by obtaining certification from the Chartered Accountants. In case of short-term corporate / clean loans, such an approach ought to be supplemented by 'due diligence' on the part of lenders themselves.

Given below are some of the measures that could be taken for ensuring end-use of funds:
(a)  Meaningful scrutiny of quarterly progress reports / operating statements / balance sheets;
(b)   Regular inspection of borrowers’ assets charged to the lenders as security;
(c)   Periodical scrutiny of borrowers’ books of accounts and the ‘no-lien’ accounts with other banks;
(d)  Periodical visits to the assisted units;
(e)  System of periodical stock audit, in case of working capital finance;
(f)  Periodical comprehensive management audit of the ‘credit’ function of the lenders.

(This list of measures is only illustrative and by no means exhaustive.)

Penal Measures
The following measures should be initiated by the banks and FIs against the wilful defaulters:

  1. No additional facilities should be granted to the listed wilful defaulters. Such defaulters should be debarred from institutional finance from the scheduled commercial banks, Financial Institutions, NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of wilful defaulters as published by RBI/CICs.

  1. The legal process, against the borrowers / guarantors should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary.

  1. Wherever possible, the banks should change the management of the wilfully defaulting borrower unit.

  1. A covenant in the loan agreements should be incorporated to the effect that the borrowing company should not induct on its board a person who appears in the willful defaulter list. In case, such a person is there on its board, he should be expeditiously removed.

Guarantees furnished by individuals, group companies & non-group companies
While dealing with wilful default of a single borrowing company in a Group, the banks should consider the track record of the individual company. In cases where guarantees furnished by the companies within the Group is not honoured when invoked, such Group companies should also be reckoned as wilful defaulters.

Where a banker has made a claim on the guarantor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply, despite having sufficient means to make payment, he would also be treated as a wilful defaulter. This treatment is applicable to guarantees taken only after September 9, 2014.

Role of auditors
In case any falsification of accounts on the part of the borrowers is observed, Banks should lodge a complaint against the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI). The complaints may also be forwarded to the RBI and IBA for records, which in turn will circulate the names of the CA firms with other financial institutions/ financial sector regulators / Ministry of Corporate Affairs (MCA) / Comptroller and Auditor General (CAG).

If the lenders desire a certification from the borrowers’ auditors regarding diversion / siphoning of funds by the borrower, the lender should award a separate mandate to the auditors. To facilitate such certification, the banks will have to incorporate appropriate covenants in the loan agreements.

Lenders could also consider engaging their own auditors for such specific certification purpose. However, this cannot substitute a bank’s own diligence in the matter.

Role of Internal Audit / Inspection
The aspect of diversion of funds should be adequately looked into while conducting internal audit and periodical reviews on cases of wilful defaults should be submitted to Bank’s Audit Committee.

Reporting to Credit Information Companies
(a)    Reserve Bank of India has granted Certificate of Registration to (i) Experian Credit Information Company of India Private Limited, (ii) Equifax Credit Information Services Private Limited, (iii) CRIF High Mark Credit Information Services Private Limited and (iv) Credit Information Bureau (India) Limited (CIBIL) to carry on the business of credit information.

(b)  Banks / FIs should submit the list of suit-filed and non suit filed accounts of wilful defaulters of Rs.25 lakh and above to all the Credit Information Companies to be made available to the banks / FIs on a near real time basis.

(c)  Credit Information Companies (CICs) have been advised to disseminate the information on suit filed accounts of wilful defaulters on their respective websites also.


Mechanism for identification of Wilful Defaulters
The mechanism for identification should generally include the following:

(a)          The evidence of wilful default should be examined by a Committee headed by an Executive Director and  two senior officers in the rank of GM / DGM.

(c)          If the Committee is convinced of wilful default, it shall issue a Show Cause Notice to the borrower. After considering their submissions an order recording the fact and reasons of wilful default is issued. If the Committee finds it necessary, an opportunity should be given to the borrower for a personal hearing. The Order of the committee shall become final only after it is confirmed by the Review Committee headed by the Chairman and two independent directors.

(d)          An officer who is in default will mean only the following categories of directors:

(i)    whole-time director

(ii)     where there is no key managerial personnel, directors as specified by the Board who has given his written consent to the Board to such specification;

(iii)    every director, in respect of a contravention of any of the provisions of Companies Act, who is aware of such contravention and has not objected to it.


Therefore, except in very rare cases, a non-whole time director should not be considered as a wilful defaulter unless:

I. he was aware of the wilful default by virtue of any proceedings recorded in the minutes of meeting of the Board and has not recorded his objection in the Minutes; or,

II.  the wilful default had taken place with his consent or connivance.

The above exception will however not apply to a promoter director even if not a whole time director.

(iv) As a one-time measure, while reporting details of wilful defaulters to the Credit Information Companies banks may remove the names of non-whole time directors in respect of whom they do not have information about their complicity in the default of the borrowing company. However, the names of promoter directors on the board of the wilful defaulting companies cannot be removed from the existing list of wilful defaulters.


(e) A similar process as detailed in sub-paragraphs (a) to (c) above should be followed when identifying a non-promoter / non-whole time director as a wilful defaulter.


Criminal Action against Wilful Defaulters

JPC Recommendations
Reserve Bank examined, the issues relating to restraining wilful defaults. Following are the recommendations of the JPC.

a.   It is essential that offences of breach of trust or cheating committed in the case of loans should be clearly defined, for the purpose of criminal action in cases pointing towards malafide intentions.

b.    Banks should monitor the end-use of funds and obtain certificates from the borrowers certifying that the funds have been used for the designated purpose.

c.  Wrong certification should attract criminal action against the borrower.

Accordingly, banks / FIs are advised, as under:

Monitoring End-Use of Funds
In case of wrong certification by the borrowers, banks / FIs may consider appropriate legal proceedings, including criminal action wherever necessary, against the borrowers.

Criminal Action by Banks / FIs
There is scope to initiate criminal action against wilful defaulters under the provisions of Sections 403 and 415 of the Indian Penal Code (IPC), 1860. Banks / FIs are advised to consider initiating criminal action, wherever considered necessary, under the above provisions.

Banks / FIs are advised to put in place a transparent mechanism, for initiating criminal proceedings.

Reporting

Need for Ensuring Accuracy
The responsibility for reporting correct information rests with the financial institutions.

Position regarding Guarantors
While reporting  wilful defaulters in respect of guarantors to RBI, banks/FIs may include ‘Guar’ in brackets i.e. (Guar) against the name of the guarantor and report the same in the Director column.

Government Undertakings
In the case of Government undertakings, it should be ensured that the names of directors are not reported. Instead, a legend ‘Government of -------- undertaking’ should be added.

Inclusion of Director Identification Number (DIN)
In order to ensure that directors are correctly identified, banks / FIs have been advised to include the Director Identification Number (DIN) as one of the fields in the data submitted by them to CICs. In case of any doubt arising on account of identical names, banks should use independent sources for confirmation of the identity of directors rather than seeking declaration from the borrowing company.

Based on the Master Circular of 1/7/15. Please visit www.rbi.org.in if required……………  Poppy