Financially distressed assets pose a systemic risk to the integrity of the banking system. The slowdown of the Indian economy in the recent past has repeatedly brought the problem of NPAs and restructured accounts to the forefront. RBI, in order to curb the menace of deliberate non-payment of the dues, siphoning off of funds, falsification of records, unilateral disposal of collateral and other fraudulent transactions in relation to credit facilities advanced by banks, introduced the concept of “wilful defaulter” in 1999. As defined in the Master Circular on Wilful Defaulters issued by the RBI, banks and financial institutions are under an obligation to maintain strict vigil on wilful defaulters and adhere to timely reporting requirements prescribed by RBI. Broadly, a wilful defaulter is a borrower who intentionally, deliberately and in a calculated manner, defaults in meeting its payment/repayment obligations despite having the capacity to honour the said obligations or diverts/siphons of funds for other purposes. The classification as “wilful defaulter” not only leads to the tarnishing of the borrower’s credit history but also restricts access to further capital. Further, wilful defaulters may be met with penal proceedings under Section 403 and 415 of the IPC.
Considering the harshness of the implications associated with the tag of a “wilful defaulter” and laying faith in the doctrine of prevention is better than cure, RBI had introduced the concept of a “non-cooperative borrower” through its Framework for Revitalising Distressed Assets in the Economy on January 30, 2014. RBI, through this framework, sought to address the issues related to growing NPAs with the three-pronged objective of a) recognising financial distress early, b) taking prompt steps to resolve it, and c) ensuring fair recovery for lenders and investors.
On February 26, 2014, RBI had come out with detailed guidelines on the formation of a Joint Lenders’ Forum and adoption of a Corrective Action Plan which provided elaborate provisions for identifying and dealing with incipient stress in different accounts. However, the process of classification as a “non-cooperative borrower” under the framework was rudimentary in nature and RBI by its notification dated December 22, 2014 has provided further clarity regarding the classification of “non-cooperative borrower”. The notification defines a “non-cooperative borrower” as “a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues” by, among other things, not providing necessary information or denying access to collateral or obstructing sale of securities etc. Further, it provides a numerical threshold of Rs. 5 Crores (Rs. 50 million) of aggregate fund-based and non-fund based facilities as a cut off limit for classifying borrowers as non-cooperative and provides a structured mechanism for dealing with “non-cooperative borrower”.
Classification as a “non-cooperative borrower”, as opposed to “wilful defaulter”, would not entirely restrict a borrower’s access to capital. However, it would impose higher provisioning requirements on banks willing to provide fresh loans to such a borrower; which would indirectly make it difficult for non-cooperative borrowers to source capital. Although the tag of a “non-cooperative borrower” may act as a clarion call for high risk borrowers and a red flag for new lenders, the direct benefit of this development in the recovery efforts of banks is debatable as the non-cooperative borrower regime would primarily hurt the banks and financial institutions through higher provisioning and reporting requirements.