Friday, September 5, 2014

Who is a Wilful Defaulter

This term - "Wilful Defaulter" has been making rounds for the past week especially because one of the richest men in India Mr. Vijay Mallya was tagged as a "Wilful Defaulter" a few days ago. I have been wondering for a while now - Why aren't any banks pressuring Mr. Mallya to repay the thousands of crores worth of money he owes them. If a common man fails to repay a loan (or credit card outstanding) that's worth just a few thousand rupees, he is put through tremendous hardships including jail time and/or banks taking possession of their property/assets to reclaim their money. So, if for just a few thousand rupees if someone has to endure all this, what about someone who owes a few thousand crores...

With Banks declaring Mr. Mallya as a Wilful Defaulter, things have taken an interesting turn because Mr. Mallya has declared that he is going to contest this tag of being named a "Wilful Defaulter" in court.

The purpose of this article is not to analyze whether there is any legal merit in this whole situation because honestly - I am No Lawyer. But, what we can do is, try to understand what is this Wilful Defaulter tag and how it would affect the person who has been given this tag...

So, Who is a Wilful Defaulter?

As per the official definition from Reserve Bank of India (RBI) a wilful defaulter in one who as a borrower has the ability to pay, but is unwilling to pay.

If I owe 50,000 rupees towards my credit card but for some strange reason I don't want to pay my bill even though I have more than enough money to repay, the bank that issued this credit card to me can declare me as a "Wilful Defaulter". Plain and simple - isn't it? 

Can a Bank just declare someone as a Wilful Defaulter - All by Themselves?

No, definitely NOT. Banks follow an elaborate procedure, as laid down by the Reserve Bank of India, before declaring somebody as a wilful defaulter. Such cases are looked into by a committee of higher functionaries headed by the executive director and two GMs/DGMs of the bank. 

So, What is the purpose of this whole exercise where you tag someone as a Wilful Defaulter?

The first and foremost purpose is to "Name and Shame" the individuals, who even though have the means to repay their debt are intentionally holding-off from doing so. As part of this process, the bank will publish photographs of defaulters and other details in newspapers and at notice boards of bank branches.

Talk about someone who is popular and easily identifiable being declared a defaulter in all of the banks branches across inda along with their photo? Or worse, what about a half page Ad on any of the top news papers with their photo? Wouldn't that be extremely shameful?

Anyways, the wilful defaulter tag is not only a naming and shaming exercise, but could also entail significant criminal and financial liabilities. Obviously, if someone were to just display photos and call people defaulters, they may not care much...

So, what are the limitations a Wilful Defaulter faces in India?

According to the RBI, Banks can do the following:

1. Write to securities market regulator (SEBI) to debar these Wilful Defaulters from accessing the securities market. So, if Mr. Mallya wants to raise debt (Via bonds) or go public (For one of his new companies), he may be prohibited from doing so.

Impact: You may be wondering, does this really matter? Definitely Yes because, the securities market is the biggest sources of funds for companies - either via shares or bonds and if this is blocked, companies may find it really hard to expand...

2. Banks will not grant additional loan/credit facilities to such wilful defaulters. In case of fraud, such persons can be debarred from institutional finance for floating new ventures for 5 years.

Impact: Not all companies run on cash. They use floating credit accounts to pay their day-to-day expenses and then offset the same once they receive the cashflow out of their sales. So, by blocking any new/existing credit facility, banks can significantly dent the companies ability to run properly.

3. Banks can initiate Legal & Criminal proceedings (Via Court) to recover their dues.

Impact: The individual could be jailed and his/her assets taken over by the bank to recover their money. Of course, this will take a long time due to the limitations of our judicial system but can be fast-tracked if the authorities feel the need to...

4. Companies that have Wilful Defaulters as part its "Board of Directors" will be prevented from accessing the Securities Market

5. Banks Will Not Do Business with any company where a person who was declared as a Wilful Defaulter is a member of the board of directors

Impact: Companies will now be cautious on who they assign as a Board of Director. In this case with Mr. Mallya, he is a member of the board of 4 companies and all 4 of those companies may end up with significant impact unless he gives-up his position in the Board...


Some Last Words:

As you can see, being declared a Wilful Defaulter is not only a shameful situation, it will have significant impact on all the businesses where the individual is a part of. So, people will try their best to make sure they arent tagged as one. This is the reason why Mr. Mallya is presently contesting the banks declaration in court.

Lets see what the Court feels!!!

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