MUMBAI: In a move that will put intense pressure on businessmen whose companies default in future, the Reserve Bank of India (RBI) has tightened wilful defaulter norms and said failure of a company to repay could result in other group units and management being termed wilful defaulters.

This cross default condition would apply if the delinquent borrower has raised funds on the strength of the balance sheet of other group companies. Banks have also been told to recover from personal guarantees provided by promoters even without exhausting other avenues.

"In cases where guarantees furnished by group companies on behalf of the wilfully defaulting units are not honoured when invoked by the banks, such group companies should also be reckoned as wilful defaulters," the RBI said.

The new norms appear to be a fallout of cases like Kingfisher Airlines where despite having a promoter guarantee and the presence of cash-rich companies in the group, lenders are finding it a challenge to raise funds. Close to 5% of the loans in the Indian banking system are in default while another 5% are under stress and have been provided some leeway in repayment under a restructuring programme.

The revised guidelines however will not be of much help to banks in recovering from existing borrowers like KFA. "It is clarified that this would apply only prospectively and not to cases where guarantees were taken prior to this circular. Banks may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees," the RBI said in its circular.

Clarifying on its earlier norms the RBI had said the defaulting 'unit' appearing therein would include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. "In case of business enterprises (other than companies), banks may also report the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise," the RBI said.

The new norms come less than a week after the RBI governor Raghuram Rajan told investors at a Citi conference in Boston that the wilful defaulter tag is a powerful weapon in the hands of creditors for resolving distressed assets and it shuts out all credit from the financial system for a borrower.

Rajan has been personally taking stock of the bad loans in the banking sector and has called for detailed lists of large defaulters. In some cases the RBI has discovered that multiple banks have advanced funds without knowing each others exposure to the borrower.

Last year the RBI had made it mandatory for lenders to obtain personal guarantees of the promoter at the time of restructuring the loan. This was to ensure that the promoters had adequate `skin in the game' while getting a project back on the rails.

