United Bank of India recently declared Kingfisher Airlines and three of its directors including Dr. Vijay Mallya as willful defaulters. With rising number of default on business loans, the Reserve Bank of India had earlier issued a circular giving freedom to banks to declare all directors of a defaulting firm as willful defaulters especially in case of fund diversion. The new definition however was stuck down by the Gujarat High Court and it restricted any penalties to only those directors directly responsible for the willful default. This has made the Reserve Bank of India go back to the drawing board to redraft a definition of willful defaulters.
What the current definition says: A willful defaulter as per the current definition of the Reserve Bank of India is someone who has essentially not used the fund for the purpose it was obtained or borrowed. A person can also be classified as a willful defaulter if he or she does not repay the funds to the borrowers when he or she was in a position to do so. Siphoning off any borrowed funds from banks, NBFCs or general public can also qualify a person as a willful defaulter. If the individual disposes the assets pledged for availing of loan without the bank’s knowledge, the person is termed as willful defaulter with no intention of paying back borrowed funds from the bank.
Reserve Bank of India brainstorming an appropriate definition: According to RBI governor Raghuram Rajan, the Reserve Bank is in the process of redefining the definition of “willful defaulters” in order to bring only those directors responsible for financial default as per the high court suggestion. The Reserve bank of India is under the process of modifying the definition of a ‘willful defaulter’ so that a distinguishing act can be made between directors seen as culpable in actively participating or being grossly negligent of willful default.
Rising NPAs and a case for non-cooperative defaulter: As the banking sector is witnessing a swift increase in the number of loan defaulters including both term loan and business loan defaulters and Non Paying Assets or NPAS, the Reserve Bank of India has issued guidelines for banks to take stern actions to avoid increase in NPA accounts. In the financial quarter ending on June 2014, the NPAs in the Indian banking system have increased to an uncomfortable level of 4.1% causing grave concern for public sector banks as well as private banks and NBFCs. There has also been a substantial increase in the number of total stressed assets including the recast loans reaching an uncomfortable level of 11% for the quarter.
The Reserve Bank of India is pondering over a new term known as a non-cooperative defaulter which would include only those directors of a company that resist the repayment of funds due to the banks. With banks not getting back their funds on time through the existing system of sarfesai, RBI governor is working on a mechanism to declare such borrowers as non cooperative. All non cooperative buyers will be dealt with a dedicated law which brings them at par with willful defaulters allowing banks the freedom to decide the best case scenario to get their dues in place.
What happens in case you default on your loan: A financial crunch is something that can happen to anyone. In case you have taken a loan from a bank and are unable to repay your loan due to financial hardship or a financial crisis, there are options one may consider to resolve the situation. Running away from the situation or the loan is never an option. A lot of people think that by not repaying the loan and avoiding the bank reminders they can get away from their loan repayment especially in case of unsecured loans.
Remember, banks have all the legal right to seek their funds which have been given as various loans to retail borrowers. In case of housing loans, the loan defaulter can request the bank to reschedule the loan or opt for a onetime settlement rather than defaulting on the loan EMI. Since the bank takes the property as collateral security, banks can sell the property to recover their funds as a last resort.
For automobile loans, banks usually issue notices for the borrower to pay the dues. If the dues are left unpaid banks can take repossession of the vehicle and issue a presale notice. In case the borrower makes the payment before the deadline of the pre sale notice, the vehicle is usually returned. If not, the vehicle is sold and the banks recover their dues.
Handling third party debt collection agents- Banks usually employ third party debt collection agents for loan recovery from defaulting parties. The third party loan recovery agents get paid as a percentage of the recovery they can make for the bank. Due to this pay structure; recovery agents are notorious to use abusive language and other methods to threaten the loan defaulter. It is imperative to note that any such move by any recovery agent is completely unlawful and unethical as per RBI loan recovery guidelines. If you face any such harassment from any loan recovery agent, file a complaint with your bank. One can even complain to the RBI loan recovery cell directly. The best way is to talk to the bank directly and work out a solution for your loan default.
Remember taking a loan is a privilege not available to everyone and it is our moral and legal obligation to repay the funds we take for various retail loans.