Non-cooperative borrower tag to serve as warning to defaulters

But may not lead to improvement in loan recoveries, say experts

Identifying a borrower as non-cooperative may not help banks in recovering unpaid loans unless such classification allows lenders to punish the defaulter, bankers and industry experts said.

"To my mind, declaring a borrower non-cooperative is only half the measure. That will not lead to an improvement in loan recovery and asset quality. There is a need to change the system. Banks need to be empowered otherwise the process will stop half way," Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, told Business Standard.

On December 22, 2014, the Reserve Bank of India (RBI) instructed lenders to classify errant borrowers as non-cooperative, making it difficult for them to get loans. 

According to the RBI, a non-cooperative borrower is a defaulter who despite having the ability to pay stonewalls lenders by not providing information sought and by denying them access to collateral.

The banking regulator said that any fresh loans to this category of borrowers will require higher provisioning as such lending will entail greater risk.

"These guidelines will become an effective tool for recovery if they cause some pain to defaulters. Higher provisioning is not necessarily a pain for the defaulter, it is a pain for banks. One way of looking at it is banks will be reluctant to provide fresh loans to non-cooperative borrowers. But that may not be enough. We can have hundreds of classification for defaulters but they will remain just that unless the borrower is penalised for not repaying his dues on time," an executive director with a large public sector bank said requesting anonymity.

Bankers said on the flip side lenders may even be tempted to declare a defaulter non-cooperative to avoid higher provisioning and stress on profitability. "The new instructions disincentivise banks from offering loans to borrowers who are classified as non-cooperative. But given the higher provisioning requirement there is a good chance that banks will not rush to declare a defaulter non-cooperative," the chief financial officer of a mid-sized private bank said.

Experts, however, believe that declaring a borrower non-cooperative will serve as a caution that if he does not start repaying on time he may be identified as a wilful defaulter, which will prevent him from having access to institutional finance and stop him from taking up board positions in any company.

"Over a period of time it has been observed that there is a weakness in post-credit supervision, which is often responsible for the loan delinquencies. In the recent past, the regulator is putting more emphasis on post-credit supervision, early detection of stress, judging intention of borrowers, etc. So, this (instruction on non-cooperative borrowers) is a step in that direction," Shinjini Kumar, leader – banking and capital markets – at PwC in India, said.

"Good lenders should anyway be doing this. But there are banks that don't have the discipline. Probably that is why this new classification was introduced. Since it will improve supervision, borrowers will understand that they cannot get away easily. It will also help borrowers in engaging with banks early if there is a genuine difficulty and help them find a solution," she added.