On June 8, the Reserve Bank of India introduced a new framework allowing wilful defaulters to reach a compromise settlement with their lenders, paving the way for loan write-offs and reigniting a long-standing political debate.

The new framework means that wilful defaulters, those who refuse to repay their loans despite having the capacity to do so, will be able to reach settlements with the banks and seek fresh loans after a 12-month cooling off period.

In the early years of Prime Minister Narendra Modi’s first term, the Reserve Bank had wanted the list of major wilful defaulters to be made public to highlight financial malfeasance, but the Centre had blocked attempts to reveal any names.

The new framework appears to contradict the Reserve Bank’s earlier guidelines that were meant to disincentivise wilful defaulters from the banking system.

The Opposition has now alleged that the Modi government is trying to rehabilitate wilful defaulters using this new framework. The central bank largely works autonomously but it comes under the finance ministry.

RBI’s new framework

While banks carried out one-time settlements earlier too, the Reserve Bank’s new circular sets out a revised framework on how this must be done in case of wilful defaulters.

The classification of wilful defaulters is also applicable in cases of loan frauds where the borrowers have diverted the loan amount for purposes other than those they had been sought for.

As of December 2022, there were 15,778 wilful default accounts across Indian banks involving an amount of Rs 3.4 lakh crore. The wilful defaulters include some prominent and big Indian businesses.

The central bank has announced that the banks’ boards will decide on compromise settlements with wilful defaulters or in cases of fraud. Further, bank officials who were involved in sanctioning such a loan cannot be involved in the process to approve a compromise settlement on it.

A “compromise settlement” refers to a negotiated arrangement the lender has with the borrower to settle the claims. This may mean the bank sacrificing some of the amount due from the borrower, and waiving claims for that amount.

More significantly, the central bank has announced that a wilful defaulter can avail new loans from the bank following at least a 12-month cooling period after a compromise settlement has been reached.

The new framework will allow banks to secure early resolutions and recover dues earlier as legal cases are time-consuming, say some bankers. This will also help lenders save on legal expenses. More importantly, writing-off will help banks show lower non-performing assets on their books. Over the past 10 years, write-offs contributed to reduction of non-performing assets worth Rs 13.2 lakh crore, data from the central bank showed.

Technical write-offs refer to a bank removing non-performing assets from its books without waiving its right to pursue recovery of the amount due, which means that the loan is no longer shown on an asset but the bank may continue efforts to recover the money.

However, bank officials and employees’ unions have opposed the new framework saying it will undermine efforts to combat wilful defaulters and create an environment where fraudsters will evade punishment. The unions have called on the central bank to withdraw the framework.

In the past, the Supreme Court too, has criticised one of the main points of the new framework – write-offs by lenders. In 2016, the Supreme Court had called such write-offs, especially those by public sector banks, relating to wilful defaulters “a big fraud”.

Reserve Bank of India Governor Shaktikanta Das. Credit: PTI
Reserve Bank of India Governor Shaktikanta Das. Credit: PTI

RBI’s contradictions?

The Reserve Bank’s new framework also appears to contradict its earlier stand. Its own guidelines issued in 2015 were meant to disincentivise wilful defaulters by blocking them from additional facilities such as borrowing from banks and financial institutions. The new framework, however, allows them to avail fresh borrowing a year gap after a compromise settlement.

Similarly, another circular by the Reserve Bank in June 2019 had held that “borrowers who have committed frauds/malfeasance/wilful default will remain ineligible for restructuring” of loans. Restructuring refers to the lender granting concessions to the borrower for legal or economic reasons relating to the borrower’s financial difficulty.

Disclosing wilful defaulters

During the initial years of the Modi government, the Reserve Bank and the Centre were on opposing sides over disclosure of names of major wilful defaulters.

In 2015, Raghuram Rajan, the Congress government-appointed governor of the central bank, had sent a list of high profile fraud cases of non-performing assets to the Prime Minister’s Office and the finance ministry seeking a coordinated investigation. As of September 2015, criminal investigations had been launched against only 22.3% of wilful defaulters vis-à-vis public sector banks, the finance ministry had told Parliament.

A year later, Rajan as well as the Parliamentary Standing Committee on Finance had called for the list of major wilful defaulters to be made public as a measure of public accountability. The parliamentary committee had said that the disclosure would allow banks to withstand pressure and interference in dealing with promoters of defaulting entities for recoveries or granting more loans.

However, the Prime Minister’s Office, the finance ministry and later the central bank itself, following the end of Rajan’s tenure, had reportedly blocked attempts made using the Right to Information to make the list of top defaulters public. This was despite orders from the Central Information Commissioner for the list to be placed in the public domain.

Eventually, following pressure with businesspersons Mehul Choksi and Nirav Modi – both subsequently declared fugitive economic offenders – fleeing India in 2018, the Centre asked banks to name and shame wilful defaulters.

Over the next two years, following a “final warning” by the Supreme Court, the Reserve Bank publicly disclosed the names of the top 100 entities or firms that had wilfully defaulted on their loans. However, it has not specifically named the promoters so far. Some of the revealed names were part of the list Rajan had sent to the Centre in 2015.

‘Suit-boot-loot-jhoot sarkar’

The Opposition has alleged that the new framework has been introduced to rehabilitate major wilful defaulters.

On June 14, the Congress re-plugged the “suit-boot-loot-jhoot sarkar” jibe it had used during Modi’s first term to claim that he has “eagerly bent or changed rules to help his friends in a few large business groups”.

“The Modi government has now provided fraudsters and wilful defaulters such as Nirav Modi, Mehul Choksi and Vijay Mallya a path to rehabilitation,” Congress leader Jairam Ramesh alleged. “While wealthy financiers of the BJP are given every undeserved convenience, honest Indians struggle to pay their loans.”

Companies linked to Choksi, Nirav Modi and Mallya were on the list of India’s top 50 wilful defaulters the Centre tabled before Parliament in December. Mallya is the former owner of the defunct Kingfisher Airlines.

The Modi government has for long been criticised by the Opposition over Nirav Modi, Choksi and Mallya fleeing the country, and their extradition to India not having been secured so far.

The Congress had also alleged in 2020, citing the Reserve Bank’s response to a Right to Information query, that some of Nirav Modi, Choksi and Mallya’s bad loans had been written-off by the banks. The party has been arguing that this write-off route should not be available to or applied for the three fugitives. In response, the Centre has said that the banks will continue to pursue recovery in these cases, as the dues have not been waived.