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:
- 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.
- The
legal process, against the borrowers / guarantors should be initiated
expeditiously. The lenders may initiate criminal proceedings against
wilful defaulters, wherever necessary.
- Wherever
possible, the banks should change the management of the wilfully
defaulting borrower unit.
- 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
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