Public Sector Banks Suffer the Most Defaults

Apr 13, 2016

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Public sector banks remain burdened under the mountain of bad loans. While their poor risk management practices are to be blamed for their present plight, even the law of the land has not been of much help in this case. This is clearly evident in the recent case of Vijay Mallya, who despite being declared as a willful defaulter, has been able to evade punishment. According to RBI, a willful default takes place when the borrower defaults in repaying his loans despite having the capacity to do so, when funds are not utilised for the specific purpose and diverted for other purposes or siphoned off or when the asset bought by the borrowed funds is sold off without the knowledge of the lender.

As per information from Credit Information Bureau of India Ltd (CIBIL), the number of willful defaulters in the country stood at 7,129 as of December 2015. And among the lending institutions, public sector banks top the list. Nationalised banks had a total of 4,705 cases of defaulting entities valued at Rs 392 billion. The country's largest bank, State Bank of India and its associate banks had the second highest number of defaults at 1,546 and valued at Rs 186 billion. In comparison, private sector had 793 cases with an overall value of Rs 102.5 billion.

Banks are required to submit the list of willful defaulters at the end of every quarter to CIBIL. This cuts off any avenues for raising credit by the defaulting entity. The entity is also prevented from floating any new business for a period of five years from the date of being declared a willful defaulter. However, there is no specific law for legal action. Normally banks initiate action against defaulting entities under the SARFAESI (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act. There is a need for more stringent laws that can act as a deterrent for promoters. SEBI is contemplating to impose capital-raising restrictions on companies that have directors who have served on the boards of companies declared as willful defaulters.

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