The Finance Ministry has initiated several steps among public sector banks (PSB) to rein in losses arising out of delinquent loans, and to boost recoveries of non-performing assets (NPA). Yet, gross NPAs of PSBs as a percentage to gross advances spiralled to 4 per cent by end-September 2012 from 3.5 per cent in June and 3.06 per cent in September 2011. The results being announced now represent a continuation of the same trend in the quarter ended December 2012.

Hence, there are stringent guidelines that could come to the aid of banks, at least in the case of major wilful defaulters, if used diligently and quickly. Wilful defaulters are those who do not repay the loans deliberately, despite having the capacity to honour their obligations, and/or those who have misused borrowed funds.

TACKLING WILFUL DEFAULTERS

To begin with, banks shall recall all the loans granted to the defaulting company when the account becomes an NPA, and thereafter issue a wilful default show cause notice to the company, guarantors and promoter directors and simultaneously ask for disclosure of the promoters’ personal property, their investments in shares of various companies in India and abroad.

Immediately thereafter they shall issue a notice under the Sarfaesi Act. The default notice on the defaulter could be displayed on the notice boards of the bank’s branches. Simultaneously, they shall initiate the process for declaring the defaulting company as a ‘wilful defaulter’ by following due process.

The defaulter’s group and associate companies could also be declared as wilful defaulters. They should be prevented from getting loans from elsewhere, by informing lender peers, non-banking finance companies (NBFCs) and other government agencies about the process the lender has initiated against them.

After declaring the company as wilful defaulter, the lender can take actions such as publication of the photographs of their promoters and directors in the newspapers. Courts have permitted this. Many PSBs have seriously followed this method and successfully recovered substantial amounts of NPAs.

This treatment could be extended to promoters of prominent/major groups that have entered the list of wilful defaulters. When such prominent defaulters are brought to book and their assets are attached or sold through auction, it would serve as a lesson for other wilful defaulters.

INVESTIGATING WRONGDOING

The lender can engage a professional detective agency to verify whether the company and its promoter directors or major shareholders have diverted or sold any assets. An appropriate order could be obtained from an appropriate authority or court, pending determination of their debt. If the bank could trace some of the assets of the promoters, their associates and family members, who have diverted funds by way of export and not brought back the proceeds into the country, it could also examine the possibility of money laundering.

Meanwhile, a couple of steps can be initiated. One, a part of the debt can be converted into equity so that major promoters become minority shareholders, and it would make it easy for the lenders to change the management. Second, buyer can be sought for the companies either through asset reconstruction companies (ARCs) or through other means to change the management of companies or take over their assets.

This can be followed up by seeking a court order for impounding the passport of the promoters and directors, citing that there is every possibility that they may run away from the country.

FUDGING OF BOOKS

The majority of advances are against receivables in the case of banks. Hence, a chartered accountant (CA) should be appointed to look into the book debts (receivables) of the defaulting company.

A majority of the book debts could have been drawn on sister concerns or other companies. If that is the case, then the bank should issue a notice under Sarfaesi Act and take over such companies in the event of default in repaying receivables. This is not being done by banks on a regular basis.

The balance sheet of the wilful defaulter can be studied, and if the accounts of the company are found fudged or fabricated, take the chartered accountant who certified its balance sheet, to court, including criminal, for falsification of the accounts of the company. The matter can simultaneously be taken to the Institute of Chartered Accountants of India (ICAI) for cancellation of the auditor’s certificate.

All the goods/machines hypothecated or charged to the bank should be taken possession of immediately, converted into a pledge and sold thereafter by public auction. This would help the bank prohibit the borrower from removing any goods or machinery from the factories or warehouses.

Some of these measures are permitted under the guidelines issued by the regulatory authority or under the law.

Wilful defaulters should not be allowed to adopt any dilatory tactics; banks should not come into the clutches of the borrower.

The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, which was converted into a statute this month, seeks to convert any part of debt into shares of a defaulting company by an ARC.

This will bring promoter directors to minority status, making it easy for the bank or ARC to change the management of the company.

It is important to appoint a competent advocate, who specialises in the bank recovery process, to guide the bank in co-ordination with its own legal department. Banks should avoid getting bogged down in internal procedural wrangles while dealing with wilful defaulters.

A balanced and timely use of these available measures will greatly facilitate or even enhance the recovery of bank loans.

(The author is Chief Advisor, ‘Banking Law’, PDS & Associates, and former CMD of Corporation Bank. Views expressed are personal.)

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