RBI gets tough; says, if a company is unable to repay then that could lead to other group units and management being termed ‘wilful defaulters’

September 10, 2014

RBI in order to put intense pressure on businessmen, whose companies default in future, has intensified wilful defaulter rules. Now if a company is unable to repay then that could lead to other group units and management being termed ‘wilful defaulters’.
RBI held: “In cases where guarantees furnished by group companies on behalf of the wilfully defaulting units are not honoured when invoked by the banks, such group companies should also be reckoned as wilful defaulters.”
Thus, this cross default condition would apply if the offending borrower has raised up funds on the strong point of the balance sheet of its other group companies. Banks have also been asked to recover from personal guarantees offered by promoters even without draining other ways. The new norms have comes as a result of cases like Kingfisher Airlines where regardless of having a promoter guarantee and the existence of cash-rich companies in the group, lenders are realizing it as a challenge to raise funds.
RBI held that “It is clarified that this would apply only prospectively and not to cases where guarantees were taken prior to this circular. Banks may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees.”
The modified guidelines nevertheless will not be of much benefit to banks in recovering from present borrowers like Kingfisher Airlines as they apply only prospectively and not to cases where guarantees were taken prior to this circular. Around 5% of the loans in the Indian Banking system are in default whereas another 5% are under stress and have been offered some flexibility in repayment under a restructuring programme. Clarifying on its earlier norms the RBI had said the defaulting ‘unit’ appearing therein would include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not.
The new norms have come soon after the RBI governor Raghuram Rajan recently held that the wilful defaulter tag is a powerful weapon in the hands of creditors.
See: “Willful defaulter tag is a powerful weapon in hands of banks for resolving bad loans”: RBI Governor