RBI must act against the rising trend of write-offs & frauds instead of sending overtures to ‘compromise’

Date: 18.07.23

The Reserve Bank of India issued a statement on June 8 that raised considerable alarm. In the statement, the RBI allowed for write-offs and compromise settlements for even frauds and willful defaulters “without prejudice to the criminal proceedings underway against such debtors”. The People’s Commission on Public Sector and Public Services joins the voices of concern raised from various quarters including the bank unions that have come out strongly against the statement. While there may be various reasons for an entity to be unable to return loans, willful defaulters and frauds are a particular category, and hence the criticism.

“A willful defaulter is a borrower who refuses to repay loans despite having the capacity to pay up” as per the definition. These are entities that may have used the loans for purposes other than the one stated and thereby misappropriated public money. “A fraudster is one who intentionally cheats the bank with false documents/information and misappropriates the money.” Both of these are criminal offences.

The bank unions said “We have always advocated for strict measures to address the issue of willful defaulters. We firmly believe that allowing compromise settlement for accounts classified as fraud or willful defaulters is an affront to the principles of justice and accountability. It not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations.”

The RBI was forced to issue a clarification by way of issuing a Frequently Asked Questions note. It claimed that the permission for banks to engage in compromise settlement with willful defaulters is not new. It also said that such compromises would be effect only at the “discretion” of lenders and on their “commercial judgment”.

There are serious concerns about the clarificatory note as it has raised more questions than answers.

1. The RBI quotes a letter purportedly written by a DGM RBI to the Indian Banks Association. RBI tries to prove that this compromise has been in practice for 15 years. A question was raised as to why this letter was not followed by a notification to scheduled Commercial banks which is the practice. Or why IBA did not issue any detailed circular permitting compromise settlements with willful defaulters and fraudsters in 2007 itself.
2. The FAQs quote Master circular on Willful defaulters dated July 1, 2015, which states that lenders agreeing to borrowers being classified as willful defaulters and states that such cases need not be reported to Credit Information Companies provided inter alia that the borrower has fully paid the amount. A closer look at the circular shows that the instructions were to deal with willful defaulters very strictly. It also quotes Joint Parliamentary Committee’s recommendation and it has given an exception to borrowers with loans outstanding up to Rs.25 lakhs only. It does not cover fraud. It also says the loan has to be fully repaid and not a reduced amount. The question is how this can be applied to everyone, including large corporates with huge outstanding sums like Rs.28000 cr in the case of ABG shipyard. The present circular does not talk about full repayment of principal and interest. A few years back Vijay Mallya offered to repay the full principal which banks did not accept because RBI did not permit it. But now it appears that such loans can be settled through a compromise with reduced payment.
3. The master circular on frauds dated 1st July 2016 says “No restructuring or grant of additional facilities may be made in the case of RFA (Red Flagged Account) or fraud Accounts. However, in case of fraud/malfeasance where the existing promoters, and the borrower company are totally delinked from such erstwhile promoters/management, banks and JLF (Joint Lenders’ Forum) may take a view on the restructuring of such accounts based on their viability, without prejudice to the continuance of criminal action against erstwhile promoters/management.” It also adds that “No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued.” Whereas the 8th June 2023 circular provides for omnibus compromise with every fraudster.
4. The recent circular also says that such compromises would be effective only at the “discretion” of lenders and on their “commercial judgment”. It is precisely this “discretion” that seems to make things murky by giving defaulters an easy way out.
5. In the FAQs the RBI provides for compromise settlement with full faith in the boards. But boards do not have an officer Director and employee Directors who are considered to be watchdogs, as they represent majority associations and unions, especially when independent Directors fail to discharge their responsibilities as stipulated in the Companies Act. Most of the board-level positions are not even filled. Many of the so-called independent directors are political representatives. The MDs are also political appointees now. Six of the 12 public owned banks do not have non-executive chairmen. Given that the same boards have given loans to large corporates that turn into willful defaulters, this clarification is worrisome, to say the least.

The People’s Commission on Public Sector and Public Services also feels that clarification from the RBI sidesteps important questions as neither the Reserve Bank nor the government seems to be in a mood to address the rising trend of defaulters, outstanding debt, write-offs and the pitiable state of recoveries that come as the outcome of such processes. As per reports, hardly 11% of the loans written off by the banks, to dress up their financial statements, has been recovered, the rest becoming irrecoverable.

Prime Minister Narendra Modi had earlier stated that the National Democratic Alliance had not granted even a single loan to parties who later defaulted on repayments. He said, “Every penny of the loans given at the behest of ‘naamdaars’ [dynasts] will be recovered.” He was referring here to the non-performing assets crisis, a product of the Congress-led regime allowing risky loans in 2006-’08 when it was on the upswing in its bubble of high growth. But in the last ten years, what we have witnessed is quite to the contrary of such claims. Write-offs by banks, both public and private, over the past 10 years have shown a phenomenal increase. Write-offs by public sector banks increased from Rs 7,187 crore in 2013 to Rs 119,713 crore in 2022. Among these public sector banks, the State Bank of India has in the last 10 years written off the highest total amount, at Rs 297,196 crores. It is followed by Punjab National Bank at Rs 92,511 crore, the Bank of Baroda at Rs 75,429 crore and the Bank of India at Rs 53,961 crore.

For private sector banks, total write-offs increased from Rs 4,115.02 crore in 2013 to Rs 53,087.03 crore in March 2022. ICICI, Axis, and HDFC were the top three private-sector banks that wrote off the highest advances. Over the past ten years, ICICI Bank has written off loans amounting to Rs 71,198 crore, Axis Bank Rs 60,764 crore and HDFC Rs 43,633 crore. The total write-offs by public sector banks and private sector banks in the 2021-’22 financial year stands at Rs 1,72,800 crore, which is much higher than the amount allocated to any of the three key social sectors namely MGNREGA, Health or Education in 2023-’24. It is worth noting that the total number of suits filed by March 31 this year for parties who have defaulted on loans of Rs 1 crore and above is 26,086. Their total outstandings are Rs 601,834 crore. Public sector banks filed 16,420 suits for loans amounting to Rs 410,758 crore. Private Banks filed 8,194 suits against parties who had defaulted on loans of Rs 1 crore and more. Together, these entities had failed to return Rs 168,031 crore. When it comes to bank frauds, here again, the track record of the last few years is abysmal and alarming. They rose nearly 17-fold from Rs 34,993 crore in the 2005-’14 period to Rs 5.89 lakh crore in the 2015-’23 period. That is nearly a 17-fold increase.

The Commission further wishes to add that a criminal offence committed by a borrower in terms of misappropriating the funds borrowed on the basis of false statements cannot be wished away by the executive instructions issued by the RBI. Such instructions are not legally sustainable. In a way, such instructions also amount to abetting criminal offences.

In light of these worrisome concerns, the People’s Commission urges the RBI and the Government to:

• To take back the above-cited circular with immediate effect. The RBI can issue instructions only in the larger interest of the public or in the interest of the depositors, an objective explicitly stated in the banking regulation legislation. RBI’s circular being neither in the public interest nor in the depositor’s interest is violative of the relevant legislation.
• To take measures to recover the loans on behalf of the creditors that are largely public sector banks so as to send a strong signal to unscrupulous borrowers.
• In clear violation of the RBI instructions, several banks have still not provided updated lists of wilful defaulters in their respective ledgers. The RBI must immediately enforce such disclosure the same at the cost of a penalty.
• The RBI must not become a party to giving such a golden handshake to fraudsters and willful defaulters in the name of conferring discretionary powers on the respective banks, as it sets a wrong precedent.

In conclusion, we wish to point out that such overtures on the part of the RBI to willful defaulters and fraudsters are going to have a serious impact on the banking system. It is the depositors from the middle class whose deposits will be used for writing off loans with negligible recovery. This would also encourage the good borrowers who are promptly repaying loans to start defaulting, which will affect the financial health of the banks and put the depositors’ interests at undue risk. Except for the borrowers who have given strong collaterals, others will tend to default and expect the banks to write off their debt, which will adversely impact the financial stability of the country.

 

People’s Commission on Public Sector and Public Services

About Peoples’ Commission on Public Sector and Public Services (PCPSPS): Peoples’ Commission on Public Sector and Services includes eminent academics, jurists, erstwhile administrators, trade unionists and social activists. PCPSPS intends to have in-depth consultations with all stakeholders and people concerned with the process of policy making and those against the government’s decision to monetise, disinvest and privatise public assets/enterprises and produce several sectoral reports before coming out with a final report. Here is the first interim report of commission- Privatisation: An Affront to the Indian Constitution.