The Reserve Bank of India (RBI) has recently proposed that banks should label a borrower as a wilful defaulter within six months from the time their account is announced a non-performing asset (NPA).
Key Highlights of the RBI Draft
Under the new system, lenders are required to identify wilful defaulters within a precise six-month period. In contrast, the previous method did not necessitate such a timeframe. The proposal commands banking institutions to assess accounts greater than Rs 25 lakh for wilful default within six months of becoming NPAs. Moreover, the draft outlines guidelines that require a non-discriminatory approach in publishing pictures of wilful defaulters. Furthermore, it prohibits credit for them for one year after removal from the List of Wilful Defaulters (LWD) or any credit for new ventures for five years post LWD erasure.
Who is a Wilful Defaulter?
A wilful defaulter is an individual or a guarantor who intentionally defaults on loan repayments, with an outstanding amount of Rs 25 lakh and above. A large defaulter is categorised as a borrower with an outstanding balance of Rs 1 crore or more, whose account has been categorised as doubtful or a loss.
Various circumstances can lead to wilful default, including not utilising the financial loan for its intended purpose, siphoning off funds, or disposing of movable or immovable assets used to secure a term loan without the bank/lender’s knowledge.
What is a Non-Performing Asset (NPA)?
NPAs are loans or advances that are overdue or in default on scheduled payments of principal or interest. In most instances, loans are classified as NPAs when repayments have not been made for at least 90 days. For agriculture sector loans, non-payment of principle and interest for two cropping seasons leads to an NPA classification.
Unraveling Different Types of NPAs
Gross NPAs consist of all loans that individuals have defaulted on, whereas Net NPAs are the amount realised after deducting the provision amount from gross non-performing assets.
Laws and Provisions Regarding NPAs
India’s bad bank, the National Asset Reconstruction Ltd (NARC), purchases bad loans from banks, thereby relieving them of the NPA burden. Various laws and acts like the SARFAESI Act, 2002, and the Insolvency and Bankruptcy Code (IBC), 2016, provide frameworks for managing NPA related issues.
The Importance of Recovering NPAs
The recovery of NPAs is vital for protecting depositors and stakeholders’ interests. Banks, especially those in the public sector, must prioritize the interests of the tax-paying public during compromise settlements.
Relevant UPSC Examination Questions
One of the previous year questions from the UPSC Civil Services Examination (2018) pertaining to this topic was: “With reference to the governance of public sector banking in India, consider the following statements: Capital infusion into public sector banks by the Government of India has steadily increased in the last decade, and to put public sector banks in order, the merger of associate banks with the parent State Bank of India has been effected.”
