SBI to crack whip on wilful defaulters to pare bad debts
July 06 2011
By : Anup Roy & Joel Rebello; livemint.com, India
Mumbai: With bad loans rising, India’s largest lender State Bank of India (SBI) is taking a tough stance on defaulters who can pay, but won’t.
As on 31 March, SBI had Rs. 25,326 crore of bad loans on its books, the highest in the industry and a little more than one-fourth of the entire industry’s stressed assets. In percentage terms, SBI’s gross non-performing assets (NPAs) constituted 3.28% of its total assets. After provisioning, or setting aside money for bad debt, net NPAs stood at 1.63%.
In a bid to address the issue, SBI has decided to aggressively pursue borrowers and mark them as wilful defaulters, wherever justified. A deputy managing director of the bank will drive the initiative.
According to Reserve Bank of India (RBI) guidelines, a wilful defaulter is a person or entity that has “defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations”.
Any entity that has not utilized the money borrowed for the specific purpose for which it was raised from the lender and diverted it to other use is also a wilful defaulter. Besides, an entity that has siphoned off funds, or has removed the fixed assets or property given by it for the purpose of securing a term loan without the knowledge of the lender, can be classified as a wilful defaulter.
The central bank also prescribes a limit of dues for individuals and entities before they can be considered wilful defaulters: Rs. 25 lakh.
Once a company is declared a wilful defaulter, it and all its affiliates are prevented from borrowing money from any financial institution. Besides, directors on the boards of such companies cannot be on the board of any other company.
A wilful defaulter is ostracized financially by all lenders as it is considered to be a criminal offence.
After analysing its assets, SBI’s management has come to the conclusion that some of its borrowers can be categorized as wilful defaulters; the bank will put pressure on them to recover money, said a senior SBI official, who did not want to be identified as the bank is yet to announce its approach on the issue of wilful defaulters.
In order to do this, SBI has constituted a committee of senior executives that will look into each case and talk to defaulting borrowers. Only after giving them a hearing will it decide on using the tag of wilful defaulter.
This is a cumbersome process for a large bank like SBI, particularly for small loans, which is why it has not pursued this process aggressively so far.
“This is being done to instil the fear of God in the hearts of defaulting borrowers,” a banking analyst said, asking not to be identified.
“We have told our people to explore such a possibility and wherever they can, they should pursue the wilful defaulter case,” the SBI official said.
Going by RBI’s norms, promoters of firms where banks and financial institutions have identified instances of funds being diverted, misrepresentation, falsification of accounts and fraudulent transactions are barred from institutional finance from banks and financial institutions for floating new ventures for five years.
The lender can also initiate criminal proceedings against the borrower and has the right to change the management of the borrower.
SBI’s cases involving possible wilful defaults of Rs. 1 crore and above have risen to Rs. 6,467.68 crore as on March 2011 from Rs. 4,982.35 crore a year ago, according to data available with credit scoring firm Credit Information Bureau (India) Ltd, or Cibil. The figure will be much higher for defaults of loans above Rs. 25 lakh.
Banks share data on defaults with Cibil and other credit information companies, in keeping with RBI guidelines.
“Putting the list of wilful defaulters on our site helps banks keep track of these companies and avoid lending to them. It is updated every month and is in public domain,” Cibil managing director Arun Thukral said. The list is available on RBI’s website, but is only accessible to bankers. The list is expected to become substantially bigger after SBI starts toughening its stance, reckon analysts.
“Banks have to take all steps to recover NPAs at all times, but for a large bank like SBI, it is important to send the right message to its borrowers because if NPAs continue to increase, it does not show its credit culture in good light,” said Robin Roy, associate director (financial services) at PricewaterhouseCoopers.
The signal of a toughened stance is also important, he said. “The bank has to signal it will spare no efforts in recovering loans,” Roy added.