WILFUL DEFAULTERS AND ACTION THERE AGAINST

Reserve Bank of India has defined the term Willful Default and communicated the guidelines laying down a system to identify and report periodically the particulars of the willful defaulters to RBI/ CIBI !Credit Information Bureau !India" td# $hese guidelines already circulated vide %aster Circular &o# '()/Recovery/ Cir*+/,--. dated )/#0#,--. are as under 1 Definitions: i) Willful Defaulter : ' willful default would 2e deemed to have occurred if any of the following events noted 1 * a" 2" $he unit has defaulted in meeting its payment / repayment o2ligations to the lender even when it has the capacity to honour the said o2ligations# $he unit has defaulted in meeting its payment / repayment o2ligations to the lender and has not utili3ed the finance from the lender for the specific purposes for which finance was availed of 2ut has di erted t!e funds for other purposes# $he unit has defaulted in meeting its payment / repayment o2ligations to the lender and has si"!oned off t!e funds so that the funds have not 2een utili3ed for the specific purpose for which finance was availed of4 nor are the funds availa2le with the unit in the form of other assets# Di ersion of funds : Diversion of funds would 2e construed to include any one of the undernoted occurrences 1 a" 2" c" d" e" f" iii) 5tilisation of short*term working capital funds for long*term purposes not in conformity with the terms of sanction1 Deploying 2orrowed funds for purposes/ activities or creation of assets other than those for which the loan was sanctioned6 $ransferring funds to the su2sidiaries / 7roup companies or other corporates 2y whatever modalities6 Routing of funds through any 2ank other than the lender 2ank or mem2ers of consortium without prior permission of the lender6 Investment in other companies 2y way of ac8uiring e8uities / de2t instruments without approval of lenders6 9hortfall in deployment of funds vis*:*vis the amounts dis2ursed / drawn and the difference not 2eing accounted for# Si"!onin# of funds: 9iphoning of funds4 should 2e construed to occur if any funds 2orrowed from 2anks/ ;Is are utili3ed for purposes un*related to the operations of the 2orrower4 to the detriment of the financial health of the entity or of the lender# $he decision as to

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whether a particular instance amounts to siphoning of funds would have to 2e a <udgment 2y the lenders 2ased on o2<ective facts and circumstances of the case# Cut$off li%its While the penal measures indicated 2elow would normally attracted 2y all the 2orrowers identified as willful defaulters or the promoters involved in diversion / siphoning of funds4 keeping in view the present limit of Rs#,.#-- lakh fi=ed 2y the Central >igilance Commission for reporting of cases of willful defaulter with an outstanding 2alance of Rs#,.#-- lakh or more would attract the penal measures stipulated 2elow# $his limit of Rs#,.#-- lakh may also 2e applied for the purpose of taking cogni3ance of the instances of siphoning / diversion of funds# &enal 'easures: In order to prevent the access to the capital markets 2y the willful defaulters4 a copy of the list of willful defaulters would henceforth 2e forwarded to RBI4 to 9?BI as well# It has also 2een decided that the following measures should 2e initiated 2y the 2anks and ;Is against the willful defaulters identified as per the definition indicated a2ove a" &o additional facilities should 2e granted 2y any 2ank / ;Is to the listed willful defaulters# In addition4 the entre"reneurs ( "ro%oters of )o%"anies where 2anks / ;Is have identified siphoning / diversion of funds4 mis*representation4 falsification of accounts and fraudulent transactions should 2e de2arred from institutional finance from the scheduled commercial 2anks4 Development ;inancial Institutions4 7overnment owned &B;Cs4 investment institutions etc# for floating new ventures for a period of . years from the date on which the name of the willful defaulter is pu2lished in the list of willful defaulters 2y the RBI# 2" 'll cases of willful defaulters of Rs#)#-- crore and a2ove 2e e=amined for filing of suits and also for considering criminal action wherever instances of 2reach of trust/ cheating/ fraud 2y the defaulting 2orrowers are detected# $he steps for foreclosure of recovery of dues 2e also initiated# c" Wherever possi2le4 the 2anks and ;Is should adopt a proactive approach for a change of management of the willfully defaulting 2orrowing unit# d" ' covenant in the loan agreement with the companies in which the notified ;Is have significant stake4 should 2e incorporated 2y the ;Is to the effect that the 2orrowing company should not induct a person who is a director on the Board of a company which has 2een identified as a willful defaulter as per the a2ove definition and that in case4 such a person is found to 2e on the Board of the 2orrower company4 it would take e=peditious and effective steps for removal of the person from its Board# It would 2e imperative on the part of the 2anks and ;Is to put a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers is kept to the 2arest minimum# It should also 2e ensured that a solitary or isolated instance is not made the 2asis for imposing the penal action# While dealing with willful default of a single 2orrowing company in a 7roup4 the 2anks/ ;Is should consider the track record of the indi idual )o%"an*4 with reference to its repayment performance to its lenders# @owever4 in cases where a letter of comfort and / or the guarantees furnished 2y the companies within the group on 2ehalf of the willfully defaulting units are not honoured when invoked 2y the 2anks / ;Is4 such 7roup companies should also 2e reckoned as willful defaulters# OTHER INSTRUCTIONS

While considering compromise proposals4 the following aspects should 2e scrupulously ensured# a" $he proposals will 2e considered 2y the competent 'uthority within whose power the sacrifice/waiver amount falls su2<ect to minimum compromise amount guidelines# $he competent authority should look into the reasons for default4 net worth of 2orrowers/guarantors4 reali3a2le value of security etc#4 while negotiating for accepta2le compromise amount# $he time re8uired to make payment under A$9 should 2e such that it has linkage with the sources availa2le e#g#4 sale of property4 raising loans from other ;I9/Banks or friends and relatives# $he thrust for recovery through compromise settlement should 2e generally in respect of dou2tful assets4 loss assets4 suit filed and decreed accounts# T!e aut!orit* a""ro in# t!e )o%"ro%ise "ro"osal+ release of se)urit*+ release of #uarantor+ s!ould not !a e san)tioned t!e )redit fa)ilit* in ,uestion in indi idual )a"a)it*It has 2een o2served that the 2ranches often inform that the wherea2outs of the 2orrowers/guarantors are not known# In this regard it is advised that 2efore stating such remarks a2out the non availa2ility of the 2orrowers/guarantors4 the 2ranches should make all out efforts to find out their wherea2outs from various sources 2y discretely en8uiring with the neigh2ors4 relatives4 friends etc#4 of the 2orrowers/guarantors# In case the defaulting 2orrower has multiple &B' accounts4 efforts should 2e made to strike compromise settlement in all &B' a/cs simultaneously# Incase4 accounts of sister concerns are performing4 due care should 2e taken to monitor the operations of these accounts closely 2y restricting our further e=posure and chalking out definite repayment programme for reduction of our lia2ilities to prevent such 2orrowers taking undue advantage / concessions at the cost of the Bank# In respect of small loan accounts having ledger 2alance upto Rs# )#-- lakh4 2ank re8uires to incur e=penses disproportionate to the recovery of dues# In such accounts compromise proposal should 2e pursued# In respect of suit filed account4 generally 2orrower approaches for compromise settlements4 when @onC2le Court is a2out to issue final orders/decree# In this regard4 sanctioning authority has to consider prospects of recovery after e=ecution of decree or to go in for compromise settlement outside court and a suita2le decision 2e taken in the interest of 2ank# In case legal action is initiated and 2ank has o2tained decree4 it is needless to add that e=ecution of decree is a must so as to 2ring pressure on the 2orrower for settlement of dues at the earliest# $he field functionaries4 wherever necessary should 2ring attachment/ in<unction on the assets of the unit and individual property4 if any4 to e=ert additional pressure on 2orrowers#

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Refund of interest wrongly charged in e=cess of the normal applica2le lending rate is not to 2e construed as a sacrifice on the part of the 2ank#