Borrowers beware, as the Bank is always right!
Prachi Narayan  and  Abhirup Ghosh 29 January 2015
The RBI guidelines on defaulters now allow banks to classify any defaulting borrower as non-cooperative and then a wilful defaulter
With sweeping regulations being made by the Reserve Bank of India (RBI) on recovery of loans and non-performing assets (NPAs), the new mantra now seems to be “the Bank is always right”. Gone are the days of prioritising the interest of the customers. Now a borrower will have to obey to what his banker says else his fate is in the hands of the bank. 
The RBI and its various guidelines has compartmentalised the hall of shame for the defaulting borrowers of the banks. The compartments are – defaulting borrower, a non-cooperative borrower and lastly there is wilful defaulter. Each of these compartments have their own set of norms and own set of surprises.
When an entity or an individual borrows money from the bank and defaults in repaying the borrowed money, banks classify them as defaulters and initiate actions for recovery of loans. The special enactments empowering banks and financial institutions to proceed against the Defaulters are Recovery of Debts Due to Banks and Financial Institutions, 1990 (RDDBFI) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
These were put in place to facilitate and ease recovery of loans due to banks, one with the help of adjudicating authorities and one a suo moto procedure which may later involve an adjudicating authority. These, however suffer from their own deficiencies - sometimes due to arbitrariness of the banks and at other times due to unreasonableness on part of the borrowers. Further, the remedies envisaged are co-existing remedies, meaning banks can resort to both at the same time. However, even with co-existing remedies in hand and delayed adjudication, these systems have not been very satisfactory with its performance. 
Non- Cooperative Borrower
The rising NPA levels and the blockage of public funds have forced the regulator to come up with more stringent guidelines.  RBI came up with another classification of “non-cooperative borrower” vide its notification dated 22 December 2014. A non-cooperative borrower is defined in the following manner – 
A non-cooperative borrower is one who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed / collateral securities, obstructing sale of securities, etc. In effect, a non-cooperative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues.
The definition encompasses all borrowers within its scope and leaves very little room for the borrower to raise voice or stand for his rights. Any legitimate attempt to stand up for its rights or any attempt of not to succumb to the demands of the banks, would lead to a borrower being classified as non-cooperative borrower. 
The guidelines further provide that banks shall put in place a “transparent” system for identifying and classifying defaulting borrower as a non-cooperative. A working committee shall be set up for the said process. The executive directors and other senior members of such banks would be the members of the committee. Such a committee shall issue a show cause notice calling upon the borrower to explain why he should not be declared as non cooperative. An opportunity of hearing shall be giving only if the committee deems necessary. The decision of the committee shall be reviewed by another Review Committee, which again shall consist of directors of the bank. 
This “transparent” mechanism is not quite transparent:
The bank constitutes a committee of its own members to classify a borrower as non-cooperative. Their own members would decide a wrong/default caused to the bank. So essentially the bank becomes a judge of its own cause.
Opportunity of personal hearing is at the discretion of the bank as opposed to the natural justice principle which warrants a mandatory opportunity hearing.
There is no scope of appeal against the decision of the bank.
The need to classify a borrower as non-cooperative is to pressure the borrower to meet its repayment obligations or else he would slip into the category of a wilful defaulter. 
Wilful Defaulter
The RBI on 7 January 2015 further came up with revisions in its wilful defaulter guidelines. The revisions not only declare a borrower as “wilful” but also declare him a defaulter for life time. 
The revised guidelines prescribe for a “transparent mechanism” for declaration of a borrower as wilful defaulter. The mechanism is almost the same as prescribed for classification of non-cooperative borrowers. Sadly, this mechanism too is not transparent in essence for above mentioned reasons as they still do not warrant a mandatory personal hearing and have no scope of appeal or judicial review or appropriate checks and balances.
Further, the penal measures do not provide for a reasonable restriction on the wilful defaulter. 
To add more to the woes, SEBI has also proposed to completely bar the wilful defaulters from any access to equity and debt markets. 
The scenario is such that a subordinated legislation devoid of natural justice will now be the rule of law with respect to wilful defaulters. Say for example, if the bank resorts to an action under section 13(4) of SARFAESI, appealing against it would mean that it will end up being the non – cooperative borrower. This, not only empowers the bank to decide upon the fate of the borrower, but also defying the borrowers right to appeal. Once classified as non-cooperative, it is just a matter of time to classify him as wilful defaulter; and once a wilful defaulter what awaits is banishment of life time - completely choking all avenues of financial assistance.
So essentially, it boils down to the fact that the bank is always right and the borrowers have nothing much left in equity and justice to look upon. Time alone shall tell the fate of the future lending and borrowing in pretext of such regulations. Borrowers have to be cautious before they take any bank finance and should keep it mind that the bank shall always be right during the course of the assistance.
(Prachi Narayan and Abhirup Ghosh are researchers at Vinod Kothari & Co)
8 years ago
What does RBI do on cases of Wilful defaulters which are known to common people? How about political gamers here? RBI must publish list of wilful defaulters to public. Why are these defaulters allowed still to enjoy?
8 years ago
while disposing of any immovable property no n.o.c.required from a co-operative housing society , so plagued property can be sold by the bankers then why Banks insist N.O.C. yes they can ask if any dues to be paid to concerned society.
Dayananda Kamath k
8 years ago
Whether RBI has the guts to verify the sanction process of banks and book the bankers who violate the norms and excess finance. force the borrowers to subscribe to other services which are not in his interest. Book the executives and cmds who harass auditors who bring out the deficiency in their process and procedures in discharge of his duty. i have a letter from RBI stating they do not interfere in internal matters of the bank.
Hemlata Mohan
8 years ago
I think the classification does not in any way change the colour of the matter- the loan is non performing. So what is wrong if one is called defaulter or non cooperative? It is not that the banks rush to name a defaulter as such as there are regular reminders- both oral and written asking him to pay. It is only when a borrower does not take the calls or show up at the bank that such actions are taken. Ability to pay and willingness to pay are two different things .No banker worth his salt would rush to a Court of Law or take action under Sarfaesi Act knowing how painful and expensive these procedures are. The RBI is still soft pedalling the defaulting borrowers- only those bankers who have dealt with them would understand the pain of getting back money from them.
8 years ago
The Reserve Bank of India is a bond maiden of the executive, no different from India's courts. Equity and justice are distant memory. What passes is what is acceptable to the powers that be. In 1947 India returned from British Rule to Islamic rule.
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