Wilful

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Wilful defaulters of Indian banks: A first cut analysis

M. Jayadev , N. Padma

PII: S0970-3896(17)30213-6
DOI: https://doi.org/10.1016/j.iimb.2019.10.005
Reference: IIMB 358

To appear in: IIMB Management Review

Received date: 2 May 2017

Revised date: 8 May 2018
Accepted date: 10 October 2019

Please cite this article as: M. Jayadev , N. Padma , Wilful defaulters of Indian banks: A first cut anal-
ysis, IIMB Management Review (2019), doi: https://doi.org/10.1016/j.iimb.2019.10.005

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 WILFUL DEFAULTERS OF INDIAN BANKS: A FIRST CUT ANALYSIS
Short title: Wilful
Jayadev M*
Professor
Finance and Accounting Area
Indian Institute of Management Bangalore
Email: jayadevm@iimb.ernet,in

&
Padma N
Doctoral Student
Finance and Accounting Area
Indian Institute of Management Bangalore
Email: padma.narayanan15@iimb.ernet.in

*Corresponding Author

Abstract:

A unique way of categorizing Non-Performing Loans (NPLs) of Indian banks is wilful defaulters
and others. Earlier empirical works have analyzed micro and macro factors influencing bank
NPLs. This paper is a first cut analysis of wilful defaulters‟ quarterly data disclosed by Credit
Information of Bureau of India Limited (CIBIL) from June 2003 to March 2015. Substantial
number of wilful defaulters are unlisted and private limited companies, financed largely by
government owned banks and are concentrated in specific regions/states. We argue that
borrowers turn to wilful defaulters not just because of adverse macro-economic factors, but also
by taking advantage of weak governance structure such as ineffective functioning of economic,
legal and political institutions of the country. On the scale of World Bank six factor country level
governance, India ranks low on controlling corruption, improving regulator quality, government
effectiveness and rule of law. Our empirical analysis supports the hypothesis that wilful loan
defaults are largely caused by the above mentioned weak/poor country level governance
factors. This paper identifies areas for improvement of governance and scope for strengthening
of credit monitoring by banks to prevent wilful loan defaults.

Keywords: Non-Performing Loans (NPLs)/ Non-Performing Assets(NPAs), Macroeconomic

Variables, Governance, Corruption, Loan Covenants

I: Introduction
Increasing trends in Non-Performing Loans (NPLs) or Non-Performing Assets (NPAs) of banks
has been a matter of grave concern to policy makers, academia and public at large, as it effects
safety of depositors, profitability of banks, and the overall financial stability of a country.
Similar to liquidity risk, failure to recover loans might impair bank stability and make banks
more vulnerable to bank runs (Schiantarelli et al, 2016). NPLs are business risk of banking
institutions; some amount of NPLs are unpreventable as the bank loans turn risky due to
unpredictable business and economic factors such as economic downturn, momentous fall in
commodity prices, liberal imports causing fall in revenues, rise in production costs and
subsequent fall in cash flows. All this adversely affects the debt servicing ability of firms. Apart
from macro-economic factors, imprudent business practices, obsession for extraordinary growth
by building excessive capacities and acquiring firms through overleveraging with a variety of
innovative debt instruments, veiled corporate structures are identified causes for increased loan
defaults1. The third most important factor is a country‟s „social infrastructure‟ composed of
economic, political, legal, and social institutions; which may influence, borrowers to exploit
the weak status of such governance, increasing loan defaults (Gorton and Winton, 2003 and
Breuer, 2006). Evidence shows that corruption-a social and economic phenomena, greater
corruption aggravates the problem of bad loans and hampers bank lending (Goel et al. (2011),
Weill (2011), Park (2012), Chen et al (2013). Political interference also adversely affects loan
defaults, loans granted to politically connected firms are less influenced by their profitability and
tangibility; political connection of CEOs is a significant violation factor in the debt market and
causes sub-optimal lending decisions by banks (Zheng Y et al (2013)). Khwaja et al. (2005)
show that political firms borrow 45 percent more and have 50 percent higher default rates; such

1
Mundra SS, speech on „Asset Quality Challenges in India: Diagnosis and Prognosis‟ at the
Edelweiss Credit Conclave, Mumbai, April 28, 2016
preferential treatment occurs exclusively in government banks. Thus bad loans may be
attributable to economic and non-economic reasons, and can be classified into those who cannot
pay and others as not willing to pay. This phenomenon may be there in all countries, but in India
the regulator has advised banks to categorize the bad loans as wilful defaulters and others; wilful
defaulters are the borrowers who are unwilling to repay the debt obligations, despite having the
capacity to pay. These are clever borrowers taking undue advantage of existing weak legal and
governance framework, although legal suits have been filed against these borrowers for recovery
of debt. Similarly, in the US, mortgage loan defaulters are categorized as strategic defaulters and
others. Strategic defaulters are individuals who are capable to pay the loan but don‟t pay
(Geraradi et al, 2015). Strategic defaults are caused by pecuniary factors and non-pecuniary
factors such as moral and social considerations (Guiso, Sapienza, and Zingales (2013). In India,
such categorization of wilful defaulters is applicable to loans given to firms and business units
but not to individuals. The capital market regulator SEBI (Securities and Exchange Board of
India) has also recognized the damage done by wilful defaulters to the financial system and has
debarred them from raising capital resources. Gropp, Scholz, and White (1997) argue that loan
defaults should be analyzed by considering borrower heterogeneity, rather than average borrower
alone. Our paper on wilful defaulters provides such differentiating opportunity. Coming to the
magnanimity of wilful default problem, the loan dues from wilful defaulters in 2003 is ₹749.50
billion and has increased to ₹1551.03 billion at the end of March 2016, with a CAGR of 67.25%.
On an average every year, approximately 30% of gross NPAs, around 2% of total banking
system loans are reported as wilful defaults (Table 1).

In this context, this paper takes advantage of the quarterly data of wilful defaulters disclosed by
CIBIL, analyzes it and examines impact of country level governance structure on wilful defaults
apart from economic factors. This paper argues the need for strengthening legal, governance and
control systems, both at macro and micro level, to arrest the crucial problem of growing wilful
defaults. This paper is first of its kind in analyzing the data base of wilful defaults in the Indian
context. The two specific contributions of this paper are - analysis of wilful defaulters‟ quarterly
data across 13 years (2003-16) and empirical evidence on significance of governance and macro-
economic factors on wilful defaults.

Rest of the paper is organized as follows: Section II reviews the concept of wilful defaults, and
analyses the wilful defaults in terms of size, trends, ownership and other related aspects. Section
III surveys some stylized facts on reasons for NPLs. Section IV presents the econometric
relationship between wilful defaults, and, governance and macro-economic variables. The
penultimate section (Section V) discusses the need for strengthening governance and control
systems to address the issue of wilful defaults. Section VI finally concludes.

II. Wilful defaulters: Concept and Trends

Acknowledging the linkages between corruption and banking sector, Central Vigilance
Commission (CVC) 2, has issued guidelines to improve vigilance administration in Banks in
19983. It is worth mentioning that India is one of the few economies, or may be the first, to issue
a set of guidelines for banks, forewarning the possibility of corruption in bank lending. The CVC
has directed all banks to report wilful default cases of ₹2.5 million and above to the Reserve
Bank of India (RBI). The Commission emphasizes on better communication among banks
regarding frauds, cheating, loan default and other exploitations by the borrowers. Following
CVC‟s advice, the regulator, RBI defines4 wilful default as the deliberate non-payment of the
loan dues, in spite of adequate cash flow and sound net worth, siphoning off of funds to the
detriment of the defaulting unit, failure to acquire assets for which bank has provided the
finance, sale of assets for personal benefits, disposal of securities and mis-
representation/falsification of accounting records and any other fraudulent transactions by the
borrower. RBI has advised the banks to report the wilful defaulters of loan amount above ₹ 2.5
million, along with the names of the promoter directors. At the end of March 2000, 42 banks and
4 financial institutions have reported a list of 240 enterprises as wilful defaulters, with a default
amount of ₹10.95 billion and for the first time, wilful loan defaulters list was made available to
public5. Of course, RBI, as a regulator has been collecting information from banks on doubtful,
loss and suit filed loan accounts of above Rupees ten million since 1995, but this data is not

2
CVC is an apex Indian governmental body created in 1964 to address governmental corruption. It has the status
of an autonomous body, free of control from any executive authority, charged with monitoring all vigilance activity

3
CVC press releases, “Press note on Instruction No.8(1)(h)/98(2) & No.8(1)(h)/98(3) dt.27/11/98”

4
RBI (Mar 13, 1999): “RBI asks Banks/FIs for Information Wilful Defaulters” and RBI (2014): “Master Circular on
Wilful Defaulters”, RBI/2014-15/73
5
This list is available on RBI website disclosed on December 5, 2000.
available in public domain. The other regulatory measures to mitigate wilful loan defaults are:
banks can file legal suits, even criminal cases against wilful defaulters if any cheat or fraud is
noticed6, debarring the directors of wilful default companies to act as director of other borrowing
firms 7, complaining to the statutory accounting body against the auditors of wilful default
companies for falsification of financial accounts 8, shaming the wilful defaulters by publishing
their photographs in newspapers, prohibiting the wilful default firms from raising any type of
capital issue and also prohibiting any fresh registration to any entity if the entity‟s promoters (or
its directors or key managerial personnel) are included in the list of wilful defaulters 9.

Thus, in India, right from 1998, various institutions – CVC, RBI, SEBI have come together to
address the issue of loan defaults possibly arising from corruption and have defined guidelines
for reducing the amount of bad loans and defaults. However, in spite of these measures the
amount of wilful defaults has not reduced, may be due to political intervention, ineffective
governance, weak legal and regulatory monitoring mechanisms and possibly corruption in the
system. This paper examines influences of these aspects on wilful defaults.

Wilful Defaults: Trends

Gross NPLs were 9% of gross advances at the end of March 2003 and gradually declined to 2%
by March 2008 and maintained the same trend till 2011 (Table 1). Thereafter Gross NPLs surged
to 7% by the end of March 2016. In the initial years, wilful loan defaults were substantial
portion of gross NPLs (ranging from 91% to 62%) but subsequently reduced to 25% by March
2016. This reduction may be attributed to better functioning of legal recovery redressal
institutions, especially, Debt Recovery Tribunals (DRTs) and introduction of SARFESI Act
2002. However, in the latest two years 2014-16, substantial increase in wilful defaults has been
reported, is could be due to either banks hiding the wilful defaults under the carpet of corporate
debt restructuring or may be due to weak supervisory process of the regulator. Thus, the trend
clearly supports empirical specification adopted in this paper that political system, poor

6
RBI (May 2, 2001): “Filing of suits to recover dues from Wilful Defaulters
RBI/2014-15/73, DBR.No.CID.BC.57/20.16.003/2014-15 “Master Circular on Wilful Defaulters”,
7

July 1, 2014
8
ICAI is a statutory body that regulates the Accounting profession in India
9
SEBI (2016): Circular on “Imposing Restrictions on Wilful Defaulters”, PR No. 56/201
regulatory monitoring and weak governance systems might be the structural weaknesses for
severity in wilful defaults.

[Insert Table 1 here]

Reflecting the dominance of Government banks in banking system, the nationalized banks and
SBI group have always had more wilful defaulters, compared to foreign and privately-owned
banks. Also, the defaults reported by private sector banks decreased from 23% (March 2008) to
15% (March 2016). (Appendix, Figure-4).

In India, normally large amount of loan is funded by a consortium of banks. If a bank reports a
particular borrower as wilful defaulter other consortium member banks may also follow suit.
Thus, a single borrower name may appear under multiple banks, we have eliminated such
overlapping in our analysis. Table 2 shows actual number of enterprises defaulted. Larger
number of enterprises have defaulted on a loan amount of less than ₹50 million.

[Insert Table 2 here]

Interestingly, from the ownership point of view, among the wilful defaulters, the number of
private limited companies is increasing while that number of public limited companies is
decreasing (Table 3). We have cross verified public limited companies identified as wilful
defaulters with the data of listed companies available from the popular corporate data base CMIE
Prowess. We observe in March 2008, the number of listed companies reported as defaulters is
181, by March 2016, this has come down to 26, indicating that the listed companies becoming
wilful defaulters on bank loans are reducing. Thus, almost all the wilful default firms are unlisted
companies, private limited, partnership and sole proprietary entities, where accounting, audit,
governance structure and control systems are relatively weak; this corroborates with Ghoul
(2016)‟s evidence that adverse effect of collectivism on bank corruption is more severe in small
and medium sized firms, privately owned firms and non-exporting firms.

[Insert Table 3 here]

It looks like wilful defaults are also influenced by regional or state level variations. In some
states, the growth rate of wilful defaults is higher than bank credit growth for the period 2009-16
(Table 4). Uttar Pradesh, Gujarat and Madhya Pradesh are the only states where credit growth is
higher than amount of wilful defaults. The regional variations in credit growth and wilful
defaults clearly raise questions on prevailing state level governance factors, political parties in
power and undue influence of politicians on bank loan decisions. Further in India, each state is
different in terms of industrial and business activity, political governance, governance through
IT, banking activity in terms of credit deposit ratios, functioning of courts and so on. Similarly,
recovery mechanisms, even the legal recovery mechanisms are not uniform across the states. The
Debt Recovery Tribunals (DRTs), legal institutions addressing the recovery of NPAs have been
started in different states at different points of time. Banks, in some specific states, might have
taken quick action against the default borrowers, while in some other states legal action might
have been delayed. Borrowers might have exploited such inconsistencies and defaulted on bank
loans irrespective of having repaying capacity. As per a newspaper report10 at least 1219
directors on the boards of listed companies have connections with wilful defaulters. Further,
some of the directors are politically active also 11, suspecting a nexus between bank credit,
political influence and loan defaults. Probably, cultural and social factors, or ethnic heterogeneity
might be influencing loan repayments leading to defaults. Empirical evidence also document the
presence of information asymmetries causing banks to rely on local expertise, local knowledge,
and relationship with borrowers while screening and monitoring borrowers (Fisman, Paravisini,
and Vig (2011), Gordon and Bovenberg (1996), James and Smith (2000), Petersen and Rajan
(1995)).

[Insert Table 4 here]

The wilful defaulters identified in a specific year persist till 2016 (Table 5). For instance, 15%
wilful defaulters‟ in 2008 are identified in 2002, indicating prevailing structural weaknesses in
recovery and insolvency resolution. We also notice that around 300 companies migrated to the
status of performing loans, but in subsequent years banks have reported them again as wilful
defaulters. This may support poor credit management practices of banks in restructuring the

10
“Directors of over 1,000 listed companies have links to wilful defaulters”, Live Mint, April 12,
2016
11
“When netas are wilful defaulters, they cut across all party lines”, The Indian Express, Pranav
Mukul , Sandeep Singh | New Delhi | Updated: April 14, 2016 10:26 am
loans or greening of these loans, despite noticing symptoms of default. This could also point to
undue influence of some influential business people to get additional financing from banks.

[Insert Table 5 here]

III. Non-Performing Loans: Stylized Facts

Banking literature has provided theoretical explanations and empirical evidence on reasons for
NPLs. This section briefly reviews these stylized facts.

Macroeconomic or systematic factors: According to the financial accelerator theory

(Bernanke and Gertler (1989), Kiyotaki and Moore (1997)) in an expansionary phase of the
economy, banks have relatively low NPLs, as both consumers and firms have sufficient flow of
income and revenues to service their debts. With the continuation of boom period, credit is
extended to low-quality borrowers and when recession sets in, NPLs increase. Carey (1998)
argues that „„the state of the economy is the single most important systematic factor influencing
diversified debt portfolio loss rates‟‟. Salas and Saurina (2002) also find significant negative
contemporaneous effect of GDP growth on NPLs, indicating quick transmission of macro-
economic developments on loan servicing abilities of economic agents. A poor macroeconomic
performance especially slower GDP growth, higher unemployment or decreasing asset prices are
the main determinants of NPLs (Nkusu, 2011).

Competition theory: Banking literature has recognized the effect of competition on banking
stability, risk taking behaviour and NPLs. The traditional “competition-fragility” view is that
intense bank competition decreases market power and profit margins, resulting in to reduced
franchise value, encouraging banks to take higher risk to increase returns which may result in to
higher NPLs (Marcus 1984, Keeley 1990, Demsetz, Saidenberg, and Strahan 1996, Carletti and
Hartmann 2002). Liberalization of financial sector such as removal of interest ceilings on
deposits erodes the franchise value, intensifies the competition also encourages banks to choose
risky asset portfolio which may result in substantial NPLs (Hellmann, Murdock, and Stiglitz
(2000), Jimenez, Lopez, and Saurina 2013). Alternate arguers of “competition-stability view is
monopoly rents (or higher interest rates) in less competitive environments may encourage firms
to take higher risks, which may result in higher non-performing loans (Berger et al, 2009).

Under the Too-Big to Fail (TBTF) presumption, highly concentrated banking market may lead to
more risk taking, and therefore more NPLs (Louzis et al 2012), more likely if they are protected
by the government safety net (Boyd and De Nicolo 2005).

Herd behaviour: Herd behaviour in financial markets is the collective behaviour of agents
ignoring their own information, and following the decision made by others (Chari and Kehoe,
2004). Some banks may follow (herding) other banks in portfolio allocation decisions while
making their own portfolio allocation (Jain and Gupta 1987). Berlin (2009) argues herding may
exacerbate the extent of bad loans and asset bubbles, as banks tend to rely less on their private
information, leading to compromise on credit standards, and increased misallocation of
resources; Evidence on Australia banking (Tran et al 2015) shows that herding in lending
decisions is associated with a higher level of impaired assets, suggesting herding distorts the
delegated role of banks in monitoring loan quality.

Collateral Value: Collateral is a prominent feature of loan contract. A significant decline in the
collateral value or value of pledged assets can amplify the business cycle through pro-cyclical
changes in credit availability (Bernanke and Gertler, 1989, 1990; Kiyatoki and Moore, 1997) and
NPLs are positively related to collateral value (Jimenez and Saurina, 2004; Berger et al., 2011).
Loans with liquid collateral are associated with low risk premiums, and these loans perform
better than those with illiquid collateral or no collateral (Berger et al, 2016). Poor liquidity of
collateral significantly increases NPLs.

Institutional Memory Hypothesis: Institutional memory is a collective set of facts, concepts,

experiences and knowledge held by a group of people. Berger et al (2004) argues that as time
passes, there may be deterioration in the ability of bank loan officers to recognize potential loan
problems leading to easing of credit standards. Because of this deterioration, credit managers
may not be able to differentiate low-quality from high-quality borrowers. The deterioration is
more so applicable in processing of soft or qualitative information (for example character and
reliability) about borrowers, rather than core quantitative information such as financial ratios and
credit scores.

Corruption in bank lending: Corruption is a challenging phenomenon present mostly in public

offices. Often, fragile and politically influenced financial systems are vulnerable to corrupt
practices of bank officers. Bank officials may compromise with high risk factors associated with
a loan proposal, resulting in bad loan (Chen et al 2015). Corruption increases banks‟ exposure to
high-risk lending, without corresponding increase in collateral requirements or interest rates to
compensate for the increased risk (La Porta, et al 2003). Politically connected firms receive
substantial preferential treatment. Such firms receive 45 percent larger loans, they also have 50
percent higher default rates on these loans; this preferential treatment is entirely driven by loans
from government banks, while the privately-owned banks show no such political undue
influence (Khawaja et al, 2005). A country‟s „social infrastructure‟ – legal, political,
sociological, and economic institutions – may also influence the behavior played out in any
principal–agent relationship including banking relationships (Breuer (2006)). Supporting this, an
increase in NPLs is related with a higher degree of corruption, degree of ethnic heterogeneity,
restrictions on wage and price controls and restrictions on banks participation in real estate
activities (Breuer (2006)).

In the Indian context, the available empirical evidence shows banks‟ NPLs are influenced by
three major sets of economic and financial factors- terms of credit, bank size induced risk
preferences and macroeconomic shocks (Ranjan and Dhal, 2003). Further, Das and Ghosh
(2007) attribute that at the macro level, GDP growth, bank level loan growth, operating expenses
and bank size play an important role in influencing troubled loans. Chaudhari and Sensarma
(2008) argue that rural branching is associated with higher NPLs. Bardhan and Mukherjee (2013)
explain that wilful default arises out of ultimate loan decision-making process of the banks, and
that higher the loan capacity of a bank higher the incidence of wilful defaults. Regarding loan
growth and NPAs, Chavan and Gambacorta(2016) find that a one-percentage point increase in
loan growth is associated with an increase in NPLs 4.3 per cent of total advances in the long run,
the response being higher during expansionary phases and that the NPL ratios of banks are found
to be sensitive to the interest rate environment and the overall growth of the economy. Misra et
al (2016) re-emphasize the significance of positive macro-economic environment and effective
governance in influencing recovery of stressed assets.

IV. Empirical Specification

In this paper, we argue that wilful default is borrower‟s deliberate exploitation of weak
governance structure prevailing in the country, in addition to adverse macro-economic conditions
depicted by low GDP growth rate, higher interest rate among others. We test the empirical
significance of governance and macroeconomic factors in explaining the wilful defaults of Indian
commercial banks.

Our empirical specification is, incremental wilful default is a function of both governance and
macro-economic conditions. The CIBIL data reports wilful default amount as a cumulative
amount. To avoid the possibility of serial correlation, we use incremental wilful default amount
as a percentage of gross advances. The empirical specification is:

Here the dependent variable is incremental wilful default as percentage of gross advances for the
period June 2003 to March 2015 covering 48 quarters
( )

( )

( ) ( )
( ) ( )
In this equation, we have considered log values for amount recovered and Gross NPAs. The
regression results are reported after adjusting for heteroskedasticity.
We have used standard OLS time series regression analysis. However, independent variables like
Gross NPAs and percentage of defaults of nationalized banks are also correlated with the
dependent variable. Thus, there is a possibility of endogeneity. To overcome this, we have also
reported GMM estimators, along with OLS estimators. GMM is a class of estimator, which is
naturally well suited to deal with potential endogeneity issues. Where the parameter of interest is
finite dimensional, and the full shape of the distribution function of data is not known, this also
overcomes the limitation of assumption of Normal distribution of OLS (Ghysels et al 2004 and
Beaton et al 2016)
Governance variables: We have considered the six governance variables suggested by
Kaufmann, Kraay, and Mastruzzi (2011). The governance variables are selected from country
specific data base released by World Bank (Kaufmann et al. (2011)). These variables are
popularly called as worldwide governance indicators. The recent empirical works of Houston et
al (2011) and Beltratti and Stulz (2012)) on influence of governance on credit crisis and
corruption in bank lending have used extensively these variables. The World Bank database
(Kaufmann et al. (2011)) explains these variables as follows:

1. Voice and Accountability: Refers to the extent to which a country‟s citizens are able to
participate in selecting their government, as well as freedom of expression, association,
and free media.
2. Political stability and absence of violence: Refers to the perception of the likelihood that
the government will be destabilized or overthrown by unconstitutional or violent means,
including political violence or terrorism.
3. Government effectiveness: Refers to the quality of public services, civil services and the
degree of its independence from political pressures, the quality of policy formulation and
implementation, and the credibility of the government‟s commitment to such policies.
4. Regulatory quality: Refers to the ability of the government to formulate and implement
sound policies and regulations that permit and promote private sector development.
5. Rule of law: Refers to the extent to which agents have confidence in and abide by the
rules of society, and the quality of contract enforcement, the police, and the courts.
 6. Control of corruption: Refers to the extent to which public power is exercised for private
gain, including both petty and grand forms of corruption, as well as “capture” of the state
by elites and private interests.

Macro-economic and banking variables:

1. GDP growth rate: Fall in GDP signifies low economic activity resulting in to higher
probability of defaults. A growing economy is likely to be associated with growing
incomes and reduced financial distress. Thus, GDP growth is negatively associated with
NPLs (Nkusu, 2011).
2. Bank credit: It is the total gross amount of loans and credit given by banks. This is the
primary function of any banking system, and hence, this necessitates the need of better
credit quality to reduce defaults (Rajan,1994)
3. Repo rate is the bench mark interest rate, and a proxy for monetary policy also. As per
Nkusu, (2011) a hike in interest rate weakens borrowers‟ debt servicing capacity, more so
if loan rates are variable.
4. SBI Prime Lending Rate/Base rate: SBI Prime Lending Rate is a leading rate and often
acts as a bench mark lending rate for other banks also. It is a proxy for interest rate on
loans. Lending rates of other commercial banks are correlated with SBI Prime Lending
Rate positively and significantly (Rajan and Dhal 2003).
5. Amount recovered: This refers to NPAs recovered through various legal forums such as
SARFAESI, DRTs and Lok Adalats12 . Collateral based loans are easily recoverable
through legal channels. This could be a proxy for collateral also. Non-performance of
loans is positively related to collateral (Jimenez and Saurina, 2004; Berger et al., 2011)
and loans with liquid collateral perform better than those with illiquid collateral or no
collateral (Berger et al, 2016). Reduction in value of pledged assets and poor liquidity of

12
Although Lok Adalats are not related to large recoveries, effective functioning of such
institution encourages loan repayment culture.
 collateral significantly increases non-performing loans. Hence, we expect amount
recovered to be negatively associated with wilful defaults.
6. Rupee-Dollar exchange rate: This is a proxy for measuring impact of US monetary policy
transmission and favorable global monetary conditions, which can foster leverage growth
by relaxing financial (borrowing) constraints. In particular, firms that are most dependent
on external finance for their business operations are likely to benefit the most from
accommodative global financial conditions and would more likely disproportionately
increase their leverage ratios relative to other types of firms (Alter and Elekdag, 2016).
Exchange rate can weaken the competitiveness of export-oriented firms and adversely
affect their ability to service their debt (Fofack, 2005). Hence, we expect exchange rate to
be positively related with wilful defaults.
7. Lags of Gross NPA: Primarily banks recognize NPLs by following the prudential
accounting norms, and subsequently identify wilful defaults based on other weaknesses.
Significance of these variables indicate how fast NPLs are downgraded as wilful defaults.
8. Ownership: This refers to the percentage of wilful default of nationalized banks. Indian
banking system is predominantly owned by Public Sector Banks (PSBs) generally
characterized as preferential treatments and political favors (Khwaja et al. (2005), Ghoul
et al (2016), Barth et al. (2009)). Largely, ownership of banks influences loan defaults.
Here, we expect ownership to be positively related with wilful defaults.

Wilful default amount is taken from CIBIL 13, bank credit, amount recovered and gross NPA data
is collected from various issues of Statistical Tables relating to Banks in India, published by the
RBI. SBI PLR is sourced from SBI web site, repo rate and exchange rate are from RBI data
sources, and GDP growth rate (adjusted for common base year) from OECD14. We have
considered the time series data of both dependent and independent variables and ensured that the
data satisfies the condition of stationarity and normality.

13
Quarterly data collected from suit filed cases available at CIBIL website. CIBIL is Credit Information Bureau India
Ltd., which collects and maintains credit records
14
OECD is Organization for Economic Cooperation and Development. Data has been collected from OECD website.
Wilful default and other macro-economic variables are quarterly observed data, this gives us an
opportunity to analyze larger set of information. For regression analysis, we have considered the
time period from June 2003 to March 2015.Regarding governance variables, we have taken the
latest value of the annual information for all the underlying quarters, aggregating low frequency
data to high frequency by following Foroni et al (2013). The underlying assumption is that the
information of the quarterly data is reflected in the annual data, which is representative of the
whole period. Besides, the governance variables are perception oriented (rather than observed
like GDP), there may not be any change during the specific year and would remain same for all
the four quarters. We had an option of aggregating the high frequency data (quarterly data) to
low frequency data (annual data) and continuing our analysis. We have not followed this
approach because we firmly believe that governance data released by World Bank is more of an
index, rather than observed variable. Thus, we are not convinced to use interpolation and
aggregation techniques normally used in dealing with mixed frequency data analysis.

Data description:
The descriptive statics of the selected variables are presented in Table 6.

Governance variables: Indian governance indicators released by World Bank show that there is
no visible improvement in governance trends (Figure 1). Thus, huge amount of wilful defaults
may be attributed to weak governance variables.

[Insert Figure 1 here]

Macro-economic variables: Fall in GDP growth from 2009-14 indicate adverse macro-economic
conditions affecting the firm performance. Increasing trends in repo rate and SBI PLRs
especially pre-2009, indicate higher borrowing costs resulting in to loan defaults. Rupee
depreciation must have also caused increase in cost of imports with consequent reduction in
cashflows available for loan repayment.

Banking related variables: The amount of wilful defaults shows an increasing trend and post
2012. It exceeded gross NPLs, and, during 2012-14, it even exceeded gross advances of entire
banking sector. The data also shows an increase in amount recovered from through legal
channels.
[Insert Figure 2 and 3 here]

Analysis of Regression Results:

Table 7 shows the expected and observed relationship between independent variable and the
dependent variables, while the regression results are presented in Table 8.

[Insert Table 6, 7 and 8 here].

Except the Rule of Law and Voice and Accountability variables, all the other four governance
variables are having the desired relationship with wilful defaults and a few are significant also,
indicating weak governance structure of the country is strongly correlated with wilful defaults.
For instance, the variable Voice and Accountability for the last 12 years is almost same (Table 6)
indicating low perceptible change. Its positive significant relationship with increase in defaults
justifies that substantial amount of wilful defaults are due to no change in governance at the
country level. As expected Control of Corruption index is negatively related with increase in
wilful defaults and is also significant. In spite of improvement in Rule of Law index its impact
on reducing wilful defaults is insignificant. Similarly, India has shown improvement in
government effectiveness but its impact on wilful defaults is marginal. India‟s ranking on
Regulatory Quality declined over the period, supporting increased wilful defaults, and the
observed positive relationship justifies this.

Regarding macro-economic variables, fall in GDP growth rate (Table 6) has contributed to
increase in wilful default amount, indicated by negative relationship, but is not significant. Repo
Rate (representing Monetary Policy), its transformation on lending rate (SBI PLR) is weak,
indicating reduction in repo rate has not transformed reduction in bank lending rates (also
supported by Mishra et al, 2016). Thus, higher interest rates increase cost of borrowing resulting
in to higher defaults.

The exchange rate is a proxy for US monetary policy. The US monetary policy encourages
emerging markets including Indian corporates to borrow more (Alter and Elekdag, 2016), rupee
depreciation must have increased the cost of borrowing, resulting in to increased wilful defaults.
Rupee depreciation must have also increased cost of imports and overall cost of production
resulting into decline in cashflows leading to increase in NPLs.
The positive relationship between immediate preceding quarterly gross NPLs (lagged) and wilful
defaults show that banks are quickly categorizing wilful defaults out of recognized gross NPLs
without much delay.

Supporting the dominance of public sector bank ownership, the bank ownership variable is
positive, but not significant. This can be attributed to the fact that RBI‟s regulatory power over
banks are not neutral to bank ownership. All commercial banks in India are regulated by the RBI
under the Banking Regulation (BR) Act of 1949. Additionally, all public-sector banks are
regulated by the Government of India (GoI) under the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970; the Bank Nationalization Act, 1980; and the State Bank of
India Act, 1955. The RBI‟s legal powers to supervise and regulate Government banks are
constrained– it cannot remove PSB directors or management, who are appointed by the
government of India (GoI), nor can it force a merger or trigger the liquidation of a government
bank; it[RBI] has also limited legal authority to hold PSB Boards accountable regarding strategic
direction, risk profiles, assessment of management, and compensation. Government banking
activity does not require license from RBI, hence, RBI cannot revoke a license whereas for
private sector banks, RBI can revoke license. This legislative reality has in effect led to a deep
fissure in the landscape of banking regulatory terrain: a system of dual regulation, regulation of
banks both by the Ministry of Finance (Government of India) and RBI.15

Our results are not comparable with earlier Indian studies which examined NPLs in general,
while we have considered wilful defaults. However, in examining the influence of macro-
economic variables; GDP growth rate, and interest rate our results are consistent with Das and
Ghosh (2007) and Chavan and Gambacorta (2016). Over all, wilful defaults are significantly
associated with country level governance variables and institutional environment prevailing in
the country. Some issues in this context are discussed in the following section.

V. Strengthening the Governance and Control systems

In this section, we discuss the need for strengthening the various governance and control
measures to address the issue of wilful defaults.

15
RBI Speeches: “Banking Regulatory Powers Should Be Ownership Neutral (Urjit R. Patel, Governor, Reserve Bank
of India – March 14, 2018 – Inaugural Lecture: Centre for Law & Economics, Centre for Banking & Financial Laws
Gujarat National Law University, Gandhinagar)”
Bank as a Governance institution: The bank-based view of financial system highlights the
positive role of banks in (i) acquiring information about firms and managers and thereby
improving capital allocation and corporate governance (Diamond, 1984; Ramakrishnan and
Thakor(1984). Boot and Thakor (1997) argue that banks as a coordinated coalition of investors
are better than uncoordinated markets at monitoring firms and reducing post-lending moral
hazard. Further, especially in countries with weak contract enforcement capabilities;
Gerschenkron (1962) and Rajan and Zingales (1998) stress that powerful banks can effectively
force firms to repay their debts than atomistic markets. The primary responsibility for monitoring
the firm lies with the lead lending bank, which sets the standard for corporate governance. The
role of the lead bank is especially important during times of distress, when it typically changes
the affiliated firm‟s management and board of directors (see, for example, Hoshi, Kashyap, and
Scharfstein,1990). In the Indian context, increasing wilful defaults raise questions on quality of
bank governance. Banks can govern the borrowers by acquiring timely information and imposing
appropriate loan covenants. Breach of loan covenants act as red alert for banks in minimizing the
defaults. In the Indian context, there is no publicly available data on loan convents at all and
hardly any information on auditor certification on compliance to loan covenants. RBI should
insist on auditor certification on loan convents and information of covenant violations should be
made publicly available.

Another effective mechanism of bank governance model is appointment of nominee directors by

the banks, at least on large borrower accounts. The data of nominee directors (Table 9) shows
that banks have appointed nominee directors on the boards of very few firms. Not more than 100
companies are having bank nominee directors. Thus, banks have not effectively administered this
governance mechanism to monitor the corporates.

[Insert Table 9 here]

Alternate model of governance is that the stock market acts as an effective institution to enforce
market discipline. Unfortunately, as stated above, large number of wilful defaulters are unlisted
and private limited companies, where stock market regulatory mechanism is not applicable.
However, an appreciable fact is that the New Companies Act 2013 16 directs the unlisted public
limited companies to follow prudent governance practices. The important among them are (i)
Emphasizing on minimum number of independent directors especially where companies have
borrowed more than ₹500 million either through bonds, deposits or bank borrowings 17 (ii)
Mandatory internal audit, where the company having an outstanding bank (or FIs) loans
exceeding ₹1000 million, and outstanding fixed deposits (in the form of debt) exceeding ₹250
million18. (iii) Mandatory audit committee is required if borrowings from banks and FIs exceeds
₹ 500 million, where majority of members of the committee should be independent directors19,
Audit committees are expected to act as vigil mechanism not only for directors and shareholders,
but also for lending banks20 (v) Board supervision of remuneration for every public company
having more than ₹500 million of bank borrowings21 .Such board supervision is expected to
prevent any undue increase in key managerial personnel remuneration, as most of these
executives are either owners or related to owners. The recent initiative22 in strengthening
governance is that the stock market regulator, SEBI has directed that any loan default by a listed
company should be reported to the stock market.

However, with regards to private limited companies, except an increase in maximum number of
equity shareholders from 50 to 200, no other changes have been done to strengthen the
governance. As most of the wilful defaulters are from private limited companies, the Department
of Corporate Affairs should come out with strengthening of audit, accounting, control and
governance frameworks relating to private limited companies.

Legal resolution mechanisms: On the parameter of resolving insolvency, India‟s ranking is 103
among 189 countries23. This is because in India, it takes more than four years to resolve a case of
bankruptcy. It is often stated that legal mechanisms for recovery of bad loans is not only weak

16
New Companies Act, 2013, Ministry of Corporate Affairs; www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
17
Section 149 read with Rule 4 (Companies appointment and qualification of Director Rules),
2014
18
Section 138, read with Rule 13 of Companies Accounts Rule, 2014
19 19
Section 177 read with the Rule 6 of the Companies (Meeting of Board and its power) Rules,
2014
20
Section 177 subsection 9 read with Rule 7 (Meeting of Board and its power) Rules, 2014
21
Section 178 read with the Rule 6 of (Meeting of Board and its powers) Rule, 2014
22
SEBI Circular “Disclosures by listed entities of defaults on payment of interest/repayment of principal amount on
loan from banks/financial institutions, debt securities, etc. CIR/CFD/CMD/93/2017
23
World Bank, Doing Business Report
but also overlapping, protecting the borrowers rather than creditors interest. Based on the
analysis of select case laws, Aparna Ravi (2015) points out that India‟s patchwork of various
insolvency laws applies to different classes of stakeholders, with conflicts between different
statues or processes which has resulted in parallel proceedings, delayed insolvency proceedings
and therefore more uncertainty for banks in recovering the bad loans. Visaria's (2009) analysis
on loans taken by Indian firms‟ shows that stricter enforcement of lenders rights improves the
repayment behavior of delinquent borrowers.

In May 2016, Insolvency and Bankruptcy Code24 was passed by the Parliament. Under the new
code even a wilful defaulter could be imprisoned up to five years, if found to have hidden
property or defrauding lenders. Besides, bankrupt individuals could be barred from contesting
elections or holding any public office. With the quick development of required institutional set
up, more than 2500 cases have been filed with National Company Law Tribunal, the adjudging
authority under the New Bankruptcy code. The new institution set up under this code is National
E-Governance Services Limited (NESL), India‟s first information utility and credit repository
which accepts, store and makes readily available authenticated financial information submitted
by creditors.

The other recent developments in strengthening the legal governance are First is that in March
2018, Government approved setting up of National Financial Reporting Authority(NFRA), that
has powers to act against erring auditors and auditing firms 25. The jurisdiction of NFRA is
extended to all listed companies as well as large unlisted public companies. NFRA acts as an
overarching watchdog for auditing profession26. The second important development is the
introduction of Fugitive Economic Offenders Ordinance 2017, which provides measures to deter
economic offenders from evading the process of Indian law by remaining outside the jurisdiction
of Indian courts, thereby preserving the sanctity of the rule of law in India. A „Fugitive
Economic Offender‟ is any individual against whom a warrant for arrest in relation to scheduled
offence has been issued by any court in India, and who leaves or has left India to avoid criminal
prosecution or refuses to return to India to face criminal prosecution. Once an individual is
declared as fugitive offender their properties as listed in the Director‟s application will be
confiscated. Once property is confiscated, offenders cannot file or defend a civil claim in court.

24
The Insolvency and Bankruptcy Code, 2016, Ministry of Law and Justice, 2016
25
“Cabinet clears setting up of NFRA to oversee auditors”, The Economic Times, March 01, 2018
26
“The Hindu explains: The Fugitive Economic Offenders Bill, 2017”, Sruthi Radhakrishnan, March 02, 2018
The Special court will appoint an „administrator‟ to oversee the confiscated property. This person
will be responsible for disposing of the property as well, and the property will be used to satisfy
creditors‟ claims.

Taking a cue from China, India can even think of banning abroad travel of bank loan defaulters.
China has toughened restrictions on 6 million bank defaulters, barring them from flights, getting
loans and credit cards, or even promotions. Around 2 million of these defaulters are even barred
from travelling in high-speed trains. Around 71,000 defaulters cannot serve as corporate
representatives or executives. The Supreme People‟s Court, China‟s apex court, has shared the
defaulters‟ ID card and passport information with airlines and railway companies. The Industrial
and Commercial Bank of China, one of China‟s largest commercial banks, has rejected several
loan and credit card applications from these defaulters. The blacklist includes members of local
legislative and political advisory bodies and Communist Party of China congress delegates. 27

Investigative agencies: India has multiple economic investigative agencies. Important among
them are Income Tax department, Revenue Intelligence, Central Economic Intelligence Bureau,
Enforcement Directorate and Special Fraud Investigation Office(SFIO). These agencies are
expected to investigate the irregularities in corporate monetary transactions such as money
laundering, tax and duty evasions and other suspicious financial transactions. Banks can
effectively use information of such actions28 taken by these agencies to strengthen monitoring of
borrowers and take preventive measures to reduce loan defaults. In the twelve years since it was
set up, SFIO has just managed to produce a total of six investigation reports that have
successfully resulted in convictions. Despite the increasing number of complaints on insider
trading, failure of NBFCs and instances of vanishing companies, the number of cases referred to
the SFIO for investigation has actually seen a dip from 83 in 2013-14 to 52 in 2014-1529.
Similarly, The Enforcement Directorate(ED) investigates cases under FEMA and Money
Laundering Act. At the end of March 2015, 1326 cases are registered and pending with the ED.
These could be some actual or potential loan defaulters also. These investigations may be helpful
to banks in early detection and prevention of wilful defaults.

27
“China bars 60 Lakh Bank Defaulters From Travelling, Getting Promotions”, Tushar Dhara, News18.com,
February 20, 2017
28
http://www.epw.in/journal/2016/53/web-exclusives/adani-group-accused-evading-1000-crore-
taxes-diamond-trade.html
29
Information given to parliament
Strengthening Governance of Government banks: The market discipline mechanism for
government owned banks is weak. Sovereign guarantee implies that all deposits are insured, and
regulatory supervisory mechanism has little impact on government owned banks. While in the
private sector banks, market and regulatory discipline may deter defaults and possibly boards
may take quick corrective action. The RBI's legal powers to supervise and regulate PSBs are also
constrained- it cannot remove PSB directors or management, who are appointed by the
government of India (GoI), nor can it force a merger or trigger the liquidation of a PSB; RBI has
also limited legal authority to hold PSB Boards accountable regarding strategic direction, risk
profiles, assessment of management, and compensation 30. There is hardly any dialogue between
auditors and the regulator. Currently, the external auditor is not obliged to report immediately to
the regulator any issues encountered in the audited bank that are of material interest to the
supervisor. Regulators has no power to access the auditor's working papers. Following the best
practices of other countries 31, the regulator should be given the explicit authority to obtain
information at any time from the external auditor regarding public and private sector banks.

Strengthening Firm level control systems: Academic research shows that large corporates
have gained significant benefit by improving operational efficiencies, which subsequently results
in cash flow improvements, by strengthening firm level control systems such as Enterprise
Resources Planning (ERP) systems. However, by tacit acceptance, many companies (mostly
small private limited) are still lagging in migrating towards such comprehensive information
systems, which enables management of the firm to take cost effective decisions and helps banks
in tracking the accurate information on sales, inventories, and collection of receivables. Banks
should give due weightage to the firms which have adopted sophisticated information systems
while appraising the loan requests and insist upon implementation of such systems as a part of
credit administration.

Information sharing and Data analytics: India is moving towards strengthening of digital
information systems with a view to strengthen the overall governance. A few steps in this

30
RBI Speeches: “Banking Regulatory Powers Should Be Ownership Neutral (Urjit R. Patel, Governor, Reserve Bank
of India – March 14, 2018 – Inaugural Lecture : Centre for Law & Economics, Centre for Banking & Financial Laws
Gujarat National Law University, Gandhinagar)”
31
Banking Supervisors and External Auditors: Building a constructive relationship, Center for Financial Reporting
Reform, World Bank Group,2015.
direction are procurement of tax payers information by NSDL 32, tracking of understatement of
incomes by income tax authorities, names of directors of wilful default firms with CIBIL, bank
account transaction information, large loan data base (CRILC33) of RBI, and NSE data base on
board of directors of listed companies. Information sharing among lenders attenuates adverse
selection and moral hazard and can therefore increase lending and reduce default rates (Jappelli
and Pagano,2002). The surge of availability of electronic financial transaction data expands the
opportunity of analyzing multiple variables and helps in identifying outliers. The emerging
opportunity of audit analytics facilitates greater value by supporting the analysis of large data
sets and revealing more granular insights. All this provides an opportunity for banks to apply a
wide range of data analytics to track the monetary transactions of borrowers in addition to
conventional practice of monitoring through just current account transactions. Even banks should
explore the opportunity of linking information available through social networks in tracking the
select borrowers‟ lavish personal life style, extravagant expenses on acquiring luxury cars,
marriages or family parties, and foreign tours with family. Application of data analytics helps in
identifying symptoms of early signals of financial indiscipline based on which banks can take
some early actions to minimize wilful defaults.

VII. Concluding Remarks

Our analysis of the 13 years wilful defaulters‟ data shows that amount of loans due from wilful
defaulters is growing substantially and every year not less than 25% of gross NPLs are reported
as wilful defaulters. Among the wilful defaulters, unlisted and private limited companies are
substantial in number clearly indicating inadequate governance and control systems prevailing in
these companies. Similarly bank loans in some Indian states turned sizably in to wilful defaults,
raising question on state level political intervention in bank lending decisions. Wilful defaults in
the last two years may be attributed to banks hiding practices, encouraged by liberal debt
restructuring and weak regulatory supervision. On the scale of World Bank six factor country
level governance, India has not improved in terms of controlling corruption, regulator quality,
government effectiveness and rule of law. Our empirical analysis clearly supports that growing
wilful defaults are significantly impacted by low quality of country level governance. To arrest

32
NSDL is National Securities Depositories Limited, an Indian Central Securities Depository, based in Mumbai
33
CRILC is Central Repository of Information on Large Credits. As per RBI guidelines, banks and financial institutions
have to furnish information on exposure to large borrowers and defaults.
the NPLs further becoming wilful defaults, we suggest that banks must strengthen the „bank
governance model‟ by imposing tighter loan covenants, strict monitoring and effective
governance through bank appointed nominee directors. Banks need to exploit transaction data
available through payment channels and collaborate with various investigative agencies. In the
US, Securities and Exchange Commission (SEC) has set up „Center for Risk and Quantitative
Analytics‟, which employs quantitative data and analysis to profile high risk behaviours and
transactions and to detect misconduct 34.Establishment of such an institution in India may be
needed to prevent the wilful defaults. On academic research side an extension to deeper analysis
on wilful defaults is needed in understanding behavioral aspects of wilful defaulters, political
connections and failure on regulatory compliance, social, and, geographical factors contributing
to wilful defaults.

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 Table 1: Gross advances, Gross NPAs and Wilful Defaults (in millions)
Year Gross Gross Wilful No. Wilful No. of Total Total Gross Wilfu % % % % Amount Amoun
Advances NPA Default Of Default by wilful Wilful numbe NPA As l gro grow growt grow Recover t
by Wilf Banks Default Default r of Percen defa wth th in h in th in ed Recove
Financia ul ers wilful tage of ults in Gros Wilful Wilfu red as
l Def (Banks) default Gross as % Gro s Defau l % of
Instituti ault ers Advanc of ss NPA lt Defa wilful
ons ers es Gros Adv Financ ult default
(Fin s anc ial Bank
anci NPAs es Institu s
al tions
Insti
tuti
ons)
3-Mar 7780430 687170 124450 1149 625040 9344 749500 10493 9% 91% 14% -3%
4-Mar 9020260 648120 129210 1021 636670 9795 765880 10816 7% 98% 16% -6% 4% 2% 34220 4.47%
5-Mar 11526820 593730 50680 538 471590 8111 522260 8649 5% 79% 28% -8% -61% -26% 51920 9.94%
6-Mar 15513780 510970 39560 341 438100 5841 477660 6182 3% 86% 35% -14% -22% -7% 83560 17.49%
7-Mar 20125100 504860 43480 335 474810 6511 518280 6846 3% 94% 30% -1% 10% 8% 73180 14.12%
8-Mar 25078850 563090 12270 76 369730 5598 382000 5674 2% 66% 25% 12% -72% -22% 76250 19.96%
9-Mar 30382540 683280 48500 331 395260 6208 443760 6539 2% 58% 21% 21% 295% 7% 74260 16.73%
10-Mar 35449650 846980 31910 267 523440 6597 555340 6864 2% 62% 17% 24% -34% 32% 75140 13.53%
11-Mar 40120790 979000 14590 123 409370 6345 423960 6468 2% 42% 13% 16% -54% -22% 156420 36.89%
12-Mar 46488080 1429030 24280 198 567900 7183 592180 7381 3% 40% 16% 46% 66% 39% 144000 24.32%
13-Mar 59718200 1940530 31800 227 688950 7360 720750 7587 3% 36% 28% 36% 31% 21% 233000 32.33%
14-Mar 68757480 2633720 438000 290 653200 5731 1091200 6021 4% 25% 15% 36% 1278% -5% 320000 29.33%
15-Mar 75606660 3233450 9514730 204 1133230 8426 10647960 8630 4% 35% 10% 23% 2072% 73% 1726000 16.21%
16-Mar 81673450 6116070 38580 140 151245 9811 1551030 9951 7% 25% 8% 89% -100% 33%
This table shows Gross Advances, percentage growth in Gross Advances, Gross NPAs, percentage growth in Gross NPA, Wilful Default Amounts (by Financial Institutions and Banks),
their respective percentage growth, number of wilful defaults by Financial Institutions and Banks, Amount Recovered, Gross NPAs as a percentage of Gross Advances, Wilful Default as
a percentage of Gross NPAs and Amount Recovered as a percentage of wilful default. This is compiled from RBI and Wilful default data base of CIBIL.
 Table 2: Default amount and Number Defaulters
Number of defaulters
Default
Amount
Rs in 31 March 31 March 31 March 31 March
Million 2003 2008 2013 2016
>10000 1 0 4 3
>5000 4 2 1 1
>3000 6 6 11 17
>2000 7 5 13 16
>1000 61 27 47 72
>500 148 61 153 208
>300 200 108 219 235
>100 1222 609 1017 860
>50 1707 906 1223 464
>10 5481 3337 4110 1861
<10 167 51 89 6
9004 5112 6887 3743
This table shows the number of defaulters, amount wise as on 31st March 2003, 2008,
2013 and 2016. This is compiled from CIBIL database by the authors. The maximum
number of defaulters have defaulted amounts between 1 – 5 crores.

Table 3: Enterprise Ownership and Wilful defaults

Public Limited Private Limited Others
Mar-03 71.88% 7.95% 20.16%
Mar-08 70.88% 9.50% 19.62%
Mar-13 52.42% 24.99% 22.59%
Mar-16 53.91% 27.12% 18.97%
This table shows enterprise wise wilful defaults. Most of the wilful defaulters are
Public Limited Companies. Recently, 2013 onwards, Private Limited companies
have started defaulting more. This is compiled from CIBIL database by the authors.
 Table 4: Wilful defaults and Credit growth of Select States
As on 31st March 2016
As on 31st March 2009 As on 31st March 2012 Growth 2009-16
Wilful
Default No. of Default Growth
Default Outstanding Amount wilful Total Amount Total rate in Growth
Amount (in Wilful bank Credit (in default Credit (in (in Wilful Credit (in default rate in
million) defaulters (in million) million) s million) million) defaults million) amount Credit
Maharashtra 183040 2118 9123680 226430 2222 13877770 512360 2763 22353050 16% 14%
Delhi 51560 620 3544250 67540 707 4658970 226580 1284 9705970 24% 15%
Tamil Nadu 42480 822 2689630 59390 758 6542650 170040 1146 3338540 22% 3%
Gujarat 35480 438 1186840 44430 739 2373300 129860 913 6823100 20% 28%
West Bengal 28000 510 1389690 43640 476 2134470 109870 685 3923770 22% 16%
Andhra Pradesh 17970 440 2121780 32410 390 2908060 148250 1013 5944800 35% 16%
Madhya Pradesh 15460 208 579570 27050 530 3814060 78500 513 4908500 26% 36%
Karnataka 15320 328 1967190 19430 220 949540 40500 265 1733080 15% -2%
Uttar Pradesh 12500 231 1111850 14640 263 1904550 28280 360 3277490 12% 17%
This table shows state wise wilful defaulters (default amount, number of wilful defaulters and outstanding bank credit). The wilful default amount and number are compiled from
CIBIL database, while bank credit is compiled from RBI database.)
 Table 5: Persistence of Wilful Defaults (as on March of each year)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2002 70% 58% 44% 29% 22% 15% 12% 11% 8% 7% 5% 3% 1% 0.17%
2003 75% 57% 36% 27% 18% 14% 12% 10% 8% 6% 3% 1% 0.17%
2004 73% 44% 34% 21% 16% 14% 11% 9% 6% 4% 1% 0.19%
2005 58% 44% 27% 20% 18% 13% 11% 8% 4% 1% 0.23%
2006 72% 45% 33% 28% 22% 17% 12% 7% 1% 0.43%
2007 61% 47% 40% 28% 22% 15% 9% 2% 0.46%
2008 75% 63% 44% 36% 27% 12% 2% 0.57%
2009 78% 56% 47% 38% 22% 8% 0.84%
2010 70% 55% 43% 25% 9% 1.16%
2011 71% 56% 32% 12% 2.10%
2012 67% 37% 14% 2.79%
2013 56% 19% 4.53%
2014 34% 7.85%
2015 27.88%
This table shows the persistence of wilful defaults. Most of the defaults persist till 2016. 1% of the defaults in 2002 persist till 2015. 10% of the defaults in 2003
persist till 2011. This has been compiled from CIBIL database.
 Figure 1: Government Indicators
1

0.5

-0.5

-1

-1.5

-2

Voice & Accountability Political Stability No violence Government Effectiveness

Regulatory Quality Rule Of Law Control Of Corruption

Figure 2: Repo Rate, GDP growth rate, SBI Prime Lending Rate and Average
Quaterly Exchange Rate
70
60
50
40
30
20
10
0
-10

Repo Rate GDP growth rate SBI Prime Lending Rate Average Quaterly Exchange Rate
 Figure 3: Gross Advances, Gross NPA, Wilful Default and Amount Recovered
35
30
25
20
15
10
5
0

ln Gross Advances ln Gross NPA ln Wilful Default ln Amt Rec

Table 6: Descriptive statistics of Dependent and Independent

variables
Variable Mean Std. Dev. Min Max
ln Wilful Default 27.30 1.55 25.68 32.59
ln Gross Advances 31.02 0.67 29.83 31.96
ln Gross NPA 27.60 0.63 26.95 28.80
Voice Accountability 0.41 0.02 0.38 0.45
Political Stability -1.18 0.15 -1.52 -0.92
Government Effectiveness -0.06 0.09 -0.20 0.12
Regulatory Quality -0.36 0.08 -0.46 -0.24
Rule Of Law 0.02 0.10 -0.11 0.19
Control Of Corruption -0.45 0.09 -0.57 -0.29
Repo Rate 6.96 1.13 4.75 9.00
ln Amount Recovered 25.54 1.01 24.26 28.18
GDP Growth Rate 1.90 1.12 -1.85 5.80
This table shows the descriptive statistics of the dependent and independent
variables.
 Table 7: Relationship between Dependent and Independent variables
Observed
relationship
Expected
Variables with
Relationship
incremental
wilful defaults

Positive and
Voice and Accountability Negative
Significant

Political Stability No Violence Negative Negative

Government Effectiveness Negative Negative

Negative and
Regulator Quality Negative
Significant

Rule of Law Negative Positive

Negative and
Control of Corruption Negative
Significant

Positive and
Amount Recovered Negative
Significant

GDP growth rate Negative Negative

Positive and
Repo rate Positive
Significant

Negative and
SBI Prime Lending rate Positive
Significant

Average Quarterly Exchange rate Positive Positive

Public sector bank ownership Positive Positive

Positive,
Negative,
Gross NPAs-Lag variables Q1,Q2,Q3,Q4 Positive Negative and
Significant,
Negative

This table shows the expected and observed relationship between the various independent
variables and wilful default.
 Table 8: Regression Results
Variables Incremental Wilful VIF Incremental
Wilful Default
Default as a
as a percentage
percentage of Gross of Gross
Advances -
Advances - OLS
GMM
Regression Regression
Voice and Accountability 10.90** 4.88 10.90***
-4.579 -3.587
Political Stability No Violence -2.165 12.74 -2.165
-1.773 -1.389
Government Effectiveness -1.501 4.84 -1.501**
-0.902 -0.707
Regulatory Quality -3.601* 6.79 -3.601**
-1.873 -1.467
Rule Of Law 6.139 32.51 6.139**
-3.679 -2.882
Control Of Corruption -6.867** 13.1 -6.867***
-2.56 -2.005
Repo Rate 0.320** 11.82 0.320***
-0.155 -0.121
log Amount Recovered 0.952** 20.59 0.952***
-0.402 -0.315
GDP growth rate -0.0592 1.54 -0.0592
-0.047 -0.0368
SBI Prime Lending Rate -0.445** 38.05 -0.445***
-0.195 -0.153
Average Quarterly Exchange Rate 0.031 20.12 0.031
-0.0333 -0.0261
Percentage of Nationalized Banks 0.193 1.93 0.193
-0.407 -0.319
Lag 1. log Gross NPA 0.738 72.42 0.738
-0.704 -0.552
Lag 2. log Gross NPA -0.323 63.18 -0.323
-0.788 -0.617
Lag 3. log Gross NPA -1.552* 82.09 -1.552**
-0.795 -0.623
Lag 4. log Gross NPA -0.0755 81.76 -0.0755
-0.834 -0.653
Constant -0.799 -0.799
-16.49 -12.92

Observations 44 44
R-squared 0.689
This table shows the OLS and GMM regression results, along with the VIF factors. Robust standard errors are shown
in the next line. *** indicates significance under 1% Confidence Interval, ** indicates significance under 5%
Confidence Interval, * indicates significance under 10% confidence interval.

Table 9: Nominee Directors of Banks and Financial Institutions on the Boards of Non-Finance Companies

Category of Banks 2008-09 2009- 2010-11 2011-12 2012-13 2013-14 2014-15

10
Public Sector Banks 25 45 67 72 91 120 106
Private Sector Banks 14 15 15 18 20 18 18

Others* 23 53 62 90 96 101 94
Total 62 113 144 180 207 239 218
Gross NPAs to Gross 2.41% 2.51% 2.36% 2.94% 3.45% 4.13% 4.70%
Advances (%)
This table shows the number of nominee directors in banks and financial institutions on boards of non-
finance companies. This is compiled from Prime Database and NPA data is compiled from RBI.
*Others include Asset Reconstruction Firms, Insurance Firms, Development Banks and Investment Firms
Appendix:

Figure 4: Wilful Defaulters: Bank Ownership Wise

0.6
0.5
0.4
0.3
0.2
0.1
0
Financial Institutions Foreign banks Nationalised Banks Private sector Banks SBI and its Associate
banks

2003 2008 2013 2016

Figure 5: Top 20 Banks with Wilful Default as on Mar 2016

45000
40000
35000
30000
25000
20000
15000
10000
5000
0