Wilful Default: A Local Solution For A Global Economic Menace

Statistics suggest the country’s top 50 wilful defaulters owe Rs 92,570 crores to Indian banks. The bigger number is what banks wrote off in the last ten years - Rs 10.1 trillion (lakh crores). The absence of such big numbers or economic discourse in developed economies such as the US and Europe makes one ponder if wilful default is only restricted to India. Rational logic may prevent economic damage and also add safeguards to India’s banking sector.

IS WILFUL DEFAULT A DOMESTIC PROBLEM?

India ranked 32^nd in a 2021 World Bank assessment of countries faring poorly on dealing with non-performing loans. India’s average NPL score stood at 6.54% - slightly better than Pakistan which was ranked 23^rd and Bangladesh at 22^nd. However, there is substantial learning from countries such as Sweden, Canada (0.38%), Switzerland (0.66%), USA (0.81%), Hong Kong (0.88%), Australia (0.91%) and UK (0.97%) that fared much better in handling NPAs. How did these countries achieve such low NPA rates?

Well, there is no easy statistic on how quickly wilful default or NPA cases got tackled. But, in most countries, there is generally a stringent law that pushes corporations and people to pay up. For instance, the law in Singapore has provisions to imprison defaulters for up to 7 years, a fine of up to $150,000 and in severe cases both. Similar provisions are applicable in Australia (Corporations Act 2001 & Bankruptcy Act 1966), United States (Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and the Fraud Enforcement and Recovery Act (FERA)), UK, Canada and elsewhere. In the United Arab Emirates (UAE), authorities have the power to seize all assets of a borrower including bank accounts and properties as a recovery measure. After a borrower provides reasonable evidence of non-payment of dues, the borrower’s ability to seek judicial recourse is usually restricted.

In India, the problem of wilful defaults has gained precedence with the media reporting and the abundant high-profile cases. Otherwise, scores of businesses across the world fail to repay loans despite having the means to do so.

TIME: THE OTHER BIG PROBLEM

Time is not a friend when it comes to dealing with non-performing assets or wilful defaulters. Lenders had declared a former aviation tycoon as a wilful defaulter in November 2015. But it took seven years for a banking consortium led by the State Bank of India to attach Rs 19,111 crores worth of assets. An early attachment of assets could have enabled the lender to avoid depreciation value.

Moreover, borrowers approach higher courts even in cases where results are fast-tracked by the National Company Law Tribunal. Besides NCLT decisions getting challenged, lenders also lose time owing to limited assets of debtors or encumbrances from other debtors and time spent in evaluating the reputational risk.

The time-constraint is also visible when one compares to variations in legal jurisdictions and banking operations across various states through the country. An IIM-B analytical report attributed lack of uniform recovery mechanisms in addition to legal variations across the country as a loophole that borrowers exploited. Besides legal latencies, corruption too adversely affected the recovery process. That brings us to the second important question – can lenders plan ahead and have time on their hands?

NEED FOR COLLABORATIVE APPROACH

While analytics could provide early warning alarms on corporate activity to a borrower, there is a need for better collaboration to tackle wilful defaults. To motivate borrowers to collaborate, the Supreme Court in its landmark SBI vs Jah Developers (May 2019) case, observed the need for the borrower to represent themselves before a committee. Periodic discussions and management reviews initiated by lenders themselves could give them adequate cues. To several banks, the identification of a non-performing loan is usually 30 days after delinquency, but predictive analytics can help in quick remedial measures.

Besides enabling the bank in crucial information, collaboration could also save legal time. For instance, in the recent Bank of Baroda vs Orbitz irrigation Ltd case, the petitioners challenged a lower court ruling by invoking Article 226 (writ petition) under the Constitution of India. It took sessions over six months until the Supreme Court dismissed the writ. The top court subsequently observed that the petitioner was permissible in seeking the bank for reconsideration of the wilful defaulter status since they had made a One Time Settlement of Rs 1.17 crores.

In the case of Orbitz, it is evident that the petitions sought removal of the wilful defaulter tag which can impact business sustainability for ages. An effective policy would hence be proof-based and expedient. Wilful defaults are a cue to social discussion; they keep our newspapers alive with catchy headlines and big numbers; provide an escape to the defaulter; and even provide content to stand-up comedians. On a serious note, such defaults, erodes public trust, affects lender’s financial viability, and dents borrower’s business. The phenomenon affects jobs, growth, economy and more importantly consumes significant legal time which could be spent elsewhere.

Author: Akshat Khetan is a distinguished corporate and legal advisor. (Twitter: @akshat_khetan). Views are personal.