State Bank of India topped the list of banks with wilful defaulters with Rs 15,069 crore stuck in 997 accounts of borrowers, recording a rise of Rs 2,759 crore in fiscal 2017. (File Photo) State Bank of India topped the list of banks with wilful defaulters with Rs 15,069 crore stuck in 997 accounts of borrowers, recording a rise of Rs 2,759 crore in fiscal 2017. (File Photo)

Banks are witnessing a surge in wilful defaults, or refusal of repayment obligations by borrowers despite having the capacity to honour the commitments. Local lenders have seen a nearly 45 per cent spike of Rs 34,900 crore in wilful defaults from last year, according to data available from TransUnion CIBIL, a credit information bureau.

The data shows that wilful defaults by borrowers from banks rose from Rs 74,694 crore in March 2016 to Rs 1,09,594 crore as of March 2017. Over the last five years, data shows, wilful defaults rose by over Rs 84,000 crore — from Rs 25,410 crore in March 2013. Fiscal 2016 witnessed a spurt of 31 per cent, and fiscal 2015 saw an increase of 47.5 per cent in such defaults, according to the data.

State Bank of India topped the list of banks with wilful defaulters with Rs 15,069 crore stuck in 997 accounts of borrowers, recording a rise of Rs 2,759 crore in fiscal 2017. Punjab National Bank was second with wilful defaults of Rs 10,989 crore in 871 accounts. Bank of Baroda’s wilful defaults soared from Rs 1,367 crore in the year ended March 2016 to Rs 4,785 crore by March 2017.

Among financial institutions, LIC’s wilful defaults came down from Rs 1,304 crore in March 2016 to Rs 1,034 crore by March 2017 and IFCI’s rose from Rs 1,069 crore to Rs 1,274 crore during the year ended March 2017.

The wilful-default accounts of SBI includes GET Engineering (Rs 424 crore), Zenith Birla (Rs 139 crore) and Rajput Retail (Rs 283 crore), among others. Bank of Baroda has classified Sidhivinayak Logistics for Rs 281 crore in defaults and ABC Cotspin for Rs 362 crore. PNB has filed suits against Zoom Developers, for Rs 410 crore in defaults, Forever Precious (Rs 747 crore) and Winsom Diamond (Rs 899 crore).

“There has been a rise in wilful defaults. This is an ongoing process in which banks categorise borrowers who have the capacity to repay or those who siphoned off funds as wilful defaulters. These are mostly legacy accounts,” said the senior official of a leading public sector bank.

A wilful default is defined by the RBI as one where the unit has defaulted in meeting its payment/repayment obligations to the lender when it has the capacity to honour these commitments. It also includes those that have siphoned off or not utilised funds for/from the specific purposes for which finance was availed. And, those that have disposed of or removed movable fixed assets or immovable property given for the purpose of securing a term loan.

“The underlying borrowers who ultimately get classified as wilful defaulters provide enough signals to spot these issues at the time of providing the loan as well as on an ongoing basis during the tenure of the loan. If used proactively, these could be used to either appropriately price the exposure upfront or reduce them much before a full-blown crisis is underway,” said Rakesh Valecha, senior director and head, Core Analytical Group, India Ratings.

Businesses can fail for reasons, which could be external or internal. According to experts, while external risks are more difficult to manage, it is the internal risks that provide clues to the possibility of a “wilful default”. Internal audits, controls and procedures are a way of minimising these but experience shows that gaps, if any, show up only after a lag and it is in the rarest of cases that an impending wilful default is identified, they said.

“In most situations, it is not the letter but the spirit, which is in question. The spirit is what an appropriate risk analysis can identify much ahead of a blowout,” Valecha said.

According to Valecha, it has also been seen with certain large groups that the balance sheet of a relatively stronger entity has been used to fund growth of other entities either within or outside the group. In some cases, this is interest free and in others interest bearing, which may or may not be contractual.

The funding could also be in the form of working capital advances or other contractual arrangements. The trend continues year on year and while the argument is that this money is recoverable at a short notice, in practice, it remains a long term investment, which may or may not generate returns, and in a worst case, is written off. Some of these exposures are to entities wherein creditors have refused to disburse money given the project delays and uncertainties, said Valecha.

C H Venkatachalam, general secretary, All India Bank Employees Association, has proposed that wilful default of bank loans should be declared as a criminal offence and criminal action initiated against defaulters.

“Banks are suffering from huge bad loans which are today nearly Rs 15 lakh crore. The bulk of the bad loans are due from private companies, business houses and corporates. What is required today is recovery of bad loans from these private companies and not handing over the banks to the same private sector. As these bad loans are not fetching any interest, there is a loss of interest income to the banks to the tune of around Rs 1,50,000 crore. So the profits are also depressed due to this loss of revenue. In addition, banks are also providing and writing off huge sums from the profits. Hence, some banks are in loss,” he said.

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