Banks have approached banking regulator with plea for amend rules for reporting on wilful defaulters and non-performing assets to prevent such borrowers from exploiting the system.
The reporting to RBI and Credit Information Companies (CICs) should continue even after they sell NPAs to Asset reconstruction companies to prevent defaulters from taking fresh loans from other lenders, bankers said.
Banks and Financial institutions can’t grant any additional facilities to those listed as willful defaulters. Also, those who have been identified for siphoning or diverting money or involved in fraudulent transactions are debarred from getting institutional finance.
Senior public sector bank executives said there is apprehension about misuse of system by willful defaulters after banks stop reporting on them. Taking benefit of lack of information sharing, they may try to getting fresh finance by floating new ventures.
This reporting will help ARCs in recovery of dues out of the financial assets acquired by them and thus redeem Security receipts.
The risks of misuse and consequent hit to loan books portfolio have come into focus after the asset quality began to suffer due to economic slowdown. The global financial crisis started the cycle of deterioration. This was compounded by the emergence of sector specific problems, especially in power, road and airlines industries.
Exposure to certain group firms that became excessively leveraged has also contributed to weakening asset quality.
The credit quality of banks in India has deteriorated notably over the last three years. Gross NPAs increased from 2.4 per cent of gross advances in March 2011 to 4.4 per cent in December 2013, before declining somewhat to 4.1 per cent in March 2014.
Banks, through Indian Banks’ Association (IBA), have also suggested to banking regulator and CICs to maintain database of willful defaulters on a permanent basis.
Any addition and deletion to this database should take place only after receipts of information from the banks, who reported the incidence of willful default in the first place.
Considering the increasing threat to the banking system from NPAs and willful defaults, the scope of reporting may be enlarged to include Regional Rural Banks, Local Area Banks and NBFCs.
Senior executive with large non-Banking finance company said till date NBFCs are not part of reporting ambit, but some beginning has happened under new framework for early detection and early resolution of stressed assets.
From April One, NBFCs can report to Reserve Bank of India (RBI) loans cases where the repayments remain due 31 to 60 days (SMA1) and for 61-90 days (SMA2). They can also become members of Joint Lender’s group (JLF) formed to firm up corrective action plan for borrowers.
Finance companies are still not required to declare borrower who is defaulter as willful defaulter and report it to the regulator.