Express View on RBI’s framework for wilful defaulters: Don’t give a free pass

Last week, the Reserve Bank of India released the framework for technical write-offs and compromise settlements, including for accounts categorised as fraud and wilful defaulters. A wilful defaulter is one who chooses not to honour obligations to banks, despite the ability to do so. The default could involve non-repayment of loans as the funds may have been diverted/siphoned off for purposes other than those for which they were obtained. Considering that in the past, the RBI has itself been against providing leeway to such borrowers — under the June 7, 2019 framework, those who have committed “frauds/malfeasance/wilful default” were ineligible for restructuring of loans — it is odd that it has now introduced a framework that paves the way for settlements to be negotiated between these borrowers and banks. This raises several troubling questions.

As these borrowers have wilfully reneged on their obligations, and in cases where they indulged in fraudulent activities, shouldn’t they be made to face the full consequences of their actions? What message does this framework send to the average Indian who honours her financial obligation? The new guidelines also point towards the possibility of these wilful defaulters being able to avail fresh loans from the banking system after a 12-month period post the settlement. What is the rationale for this? And then, why only a 12-month period? Moreover, as these agreements usually tend to be settled at amounts significantly lower than what is actually owed to banks, will they be opened up and subject to scrutiny in a different political environment? Bank unions have come out against this framework, arguing that it “may compromise the integrity of the banking system and undermine efforts to combat wilful defaulters effectively”. As per data shared by the government in Parliament, at the end of March 2022, the top 50 wilful defaulters owed Rs 92,570 crore to banks. Gitanjali Gems, owned by Mehul Choksi, was at the top of the list with outstanding dues of Rs 7,848 crore. Choksi and his nephew Nirav Modi, who is also facing fraud charges, have fled the country. Others on the defaulter list include Winsome Diamonds and Kingfisher Airlines. Under the new framework, banks can, in the future, negotiate settlements with such entities/promoters who have committed fraud, many of whom have fled the country.

Considering that the ruling dispensation has repeatedly stated its intent to go after those who have defrauded the banking system, it is perplexing that rather than punish these unscrupulous players, this new framework will end up creating the space for continued misuse. As public sector banks dominate the country’s financial system, and most bad loans have in the past tended to originate in these banks, it is ultimately the taxpayer who will bear the cost. Coming less than a year before national elections, this new framework does not pass the political smell test. It must be reconsidered.