On Tuesday at the press conference that followed the Reserve Bank of India (RBI’s) bi-monthly monetary policy announcement, governor Raghuram Rajan made his point with a good example on why the names of all bank loan defaulters shouldn’t be put up in public domain.
“Sometimes you default on your credit card bill you just forgot. Would you like the credit card default to be put up in public?" Rajan asked. “Act of default happens in business and sometimes it is not your fault," Rajan said.
Rajan also said why it is okay to publish the names of ‘wilful defaulters’, where banks have conviction that promoters have taken them for a ride. Wilful defaulters are those who do not pay back to banks even if they have the capacity to do so.
The governor indeed has good logic on whom banks should ‘name and shame’ and whom banks shouldn’t. It is the same logic the central bank presented before the Supreme Court, on 30 March, when it submitted the list of top bank loan defaulters (those with above Rs 500 crore loans) in a sealed cover.
On 1 April Firstpost put out a list of top wilful defaulters of Indian banks that included the names of those with Rs 500 crore exposure. The list included names like Zoom Developers, Winsome Diamonds, Forever Precious Jewellery and Diamonds and Deccan Chronicle Holdings.
In all, there are 7,129 accounts with amount to the tune of Rs 70,540 crore in wilful defaulter accounts. These loans constitute about 18 percent of the overall bad loans (Rs 400,000 crore) of Indian banks and about 1 percent of the total loans (Rs 65 lakh crore approximately) given by the banking sector.
The question, beyond the naming and shaming debate, is there a plan of action for the RBI or other sector regulators to recover money from wilful defaulters beyond ‘naming and shaming’? Obviously, the burgeoning list of wilful defaulters shows that these wilful defaulters aren’t really bothered by being ‘named and shamed’ in the public.
Theoretically, wilful defaulters are those who have the ability to pay the banks back but wouldn’t do so deliberately. Ultimately, what matters is to get back the public's money from these borrowers. According to senior bankers, the recovery from wilful defaulter accounts has been remarkably poor. In other words, the tag of wilful defaulter has proved to be hardly effective when it comes to prodding defaulters for actual repayment.
Though at least three banks — State Bank of India, Punjab National Bank and United Bank of India — tagged Kingfisher as wilful defaulter (United Bank late withdrew the tag on a court order), there has been no progress yet on the loan recovery process in this case. Mallya owes over Rs 9,000 crore to a host of 17-banks and left the country on 2 March amid investigations and court cases against him on the default case. Banks are still on the wild-goose chase.
Compared with a normal NPA account, the recovery in wilful defaulter account is even more difficult for banks. In the first place, these accounts are tagged as wilful defaulter accounts since there is no intent to pay back. Also, such crony promoters are influential in political circles and bureaucracy and have the money power to fight long legal battles.
Clearly, the ‘powerful’ weapon of ‘wilful defaulters’ has proved to be powerless when it comes to taking on big tycoons, who have openly waged war against banks.
Wilful defaulters need to be treated separately from the normal loan defaulters. Tackling them will require coordinated action between the RBI, other sector regulators and the government. The RBI, as the banking regulator, should take initiative.
At present, the maximum banks can do in the battle against wilful defaulters is to fight them in courts — some time for years by when the value of the underlying asset would have eroded sharply leaving banks nothing to recover.
Banks have aggressively started reporting NPAs in the December quarter after the RBI has set a deadline of March 2017 for banks to clean up their balance sheets. At the presser, Rajan was largely silent on how banks can take ahead the loan recovery process from cronies, who are tagged as wilful defaulters. Clearly, he owes an answer.