RBI tightens norms to deal with errant borrowers

'Non-cooperative' borrowers to find getting new loans more difficult

Banks can now classify errant borrowers, particularly promoters of companies that have not repaid dues, as ‘non-cooperative’, making it difficult for them to get fresh loans.

The new norms will apply to individuals, promoters and directors of companies, excluding independent directors and directors nominated by the government and the lending institutions.

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 rules are applicable for loans over Rs 5 crore. Banks will have to disclose such accounts to the Central Repository of Information on Large Credits.

The new category is in addition to the one on wilful defaulters. According to bankers, it is difficult to tag a wilful defaulter because of the legal recourse available. Banks also need evidence of funds being siphoned off to establish wilful default.

The rules about non-cooperative borrowers do not have any such provision. Banks will, therefore, find it easier to label a borrower ‘non-cooperative’. The provisioning requirement for subsequent loans to such borrowers will be higher.

“Banks/financial institutions will be required to make higher provisioning as applicable to substandard assets in respect of new loans sanctioned to such borrowers as also new loans sanctioned to any other company that has on its board any of the wholetime directors/promoters of a non-cooperative borrowing company,” said the Reserve Bank of India (RBI), the banking regulator, on Monday.

 

"These guidelines will help banks in recovering their dues and lead to an improvement in the credit climate. If a borrower is not repaying his loans despite having the capacity to pay, banks can now exert pressure using these guidelines. If the borrower is identified and declared non-cooperative, he will be at a disadvantage in securing fresh loans from banks," Sanjay Arya, executive director, United Bank of India, told Business Standard.

The Kolkata-based lender took the lead in labelling the grounded Kingfisher Airlines and its promoter Vijay Mallya as wilful defaulters.

While making it easier for banks to recover dues, the RBI has laid out the process and the circumstances in which such action is to be taken. Banks are, for instance, required to give a chance to the borrower to respond.

Relief for small banks
Bankers said the rules on non-cooperative borrowers would help smaller banks in recovering loans from corporate groups.

"Borrowers who have taken loans from a consortium generally do not care much about the smaller banks. Their priority is to repay the loans of banks that have given them big advances. Hence, such accounts first become non-performing for smaller banks,” a senior banker with a mid-sized public sector bank said requesting anonymity.

“The new norms will suit smaller banks because if we identify a customer as non-cooperative any fresh exposure to such a borrower will require higher provisioning. Hence, big banks will also exert pressure to ensure the existing loans are repaid for all banks," the senior banker added.

As non-performing assets or bad loans in the banking system have mounted over the past few years in a slowing economy, the government and the central bank are taking steps to improve recovery. The government is planning to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and the debt recovery tribunal laws to deal with bad loans, especially those resulting from wilful default.

CATCHING THE DEFAULTERS
A non-cooperative borrower is anyone who does not pay on time despite having the ability to do so or stonewalls recovery efforts of lenders

What are the criteria for declaring a non-cooperative borrower?

• Those with aggregate fund-based and non-fund-based facilities of Rs 5 crore
• For a company, non-cooperative borrowers will include promoters and directors (ex independent directors and govt nominees)
• For a business not a company, non-cooperative borrowers will include those in charge of the management

What happens if one is declared a non-cooperative borrower?

• Further loans become difficult as any fresh exposure to such a borrower will need higher provisioning by banks
• Directors of non-cooperative entities will find it difficult to continue on other companies’ boards
• New loans to a company with a non-cooperative borrower on board will also need higher provisioning (however, the new loans would be treated as standard assets)

How can banks identify non-cooperative borrowers?

• A committee under an executive director of the lender will decide on who is a non-cooperative borrower
• The borrower must get enough time to respond to a show-cause notice
• The order of the committee must be reviewed by another committee headed by lender’s chairman or CEO
• The second committee will finally decide on declaring a borrower non-cooperative
• Banks must report information on these borrowers to Central Repository of Information on Large Credits
• The status of these borrowers should be reviewed every half year by the banks’ boards