Credit DeniedBanking, markets regulators plan to shut all funding avenues for wilful defaulters

Banking and markets regulators are working to ensure that wilful loan defaulters are totally shut out from any kind of funding, even from the markets, to end the practice of investors enriching themselves even as they run companies into the ground.  This is the latest initiative by Reserve Bank of India governor Raghuram Rajan to rid the banking system of practices that have eroded its health.

The Indian banking system has been at the receiving end of investors who manage to dupe banks of thousands of crores of rupees. They either go to court and get orders preventing banks from auctioning the collateral or in some cases even bribe bank officials to escape the loan recovery process. The Central Bureau of Investigation last week arrested Syndicate Bank chairman Sudhir Kumar Jain on bribery charges.

The central bank is working on a definition of a non-co-operative defaulter who exploits the legal process to ensure that pledged assets don’t get sold off by banks in case of a default. “We are looking at our own definition of non-co-operative defaulter,” said Rajan. “He is not in violation of laws or anything.” These are investors who hold up collection at every court using every instrument that they can even when it is clear that law suggests they should pay.

In addition to the above the Reserve Bank of India (RBI) is tightening norms for guarantors, standing surety to a loan is set to get tougher in the coming days.   The central bank has said that individuals and entities furnishing guarantees for borrowers, who turn out to be wilful defaulters later, can also be classified as wilful defaulters, if they refuse to clear the dues. “In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter,” according to the Reserve Bank of India’s recent circular.

Source:  Economic Times of India