Wilful Defaulting and Defaulters of India |Study Important Facts for UPSC!

Wilful defaulting refers to a situation in which a borrower intentionally does not repay a loan despite having the ability to do so. In India, there have been several high-profile cases of wilful defaulters in recent years, particularly in the banking sector. Some of the notable defaulters include Vijay Mallya, Nirav Modi, and Mehul Choksi, who have fled the country to avoid facing legal action. These defaulters have caused significant losses to Indian banks, resulting in a rise in non-performing assets (NPAs) and a strain on the country's financial system. The Indian government has taken steps to address this issue, including enacting the Insolvency and Bankruptcy Code to facilitate the recovery of bad debts.

Wilful Defaulting and Defaulters of India is one of the most important topics for the UPSC IAS exam. It covers a significant part in the ‘Indian economy – growth and development’ (General Studies-3) syllabus and current events of national importance in UPSC prelims. 

In this article, we shall study the Wilful Defaulting - Study in detail about the wilful defaulters, willful defaulter meaning, RBI and CIBIL willful defaulter lists etc.

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What is Willful Defaulting?

Willful defaulting is the deliberate and intentional act of failing to repay a loan or debt obligation when you have the financial means to do so. It goes beyond simple non-payment due to hardship. It involves a conscious decision to avoid fulfilling your financial responsibilities, often with the intent to deceive or mislead the lender. This can have serious legal and financial consequences.

Historical Background of Wilful Defaulting

Wilful defaulting is not a new phenomenon in India and has a long historical perspective. 

• Nationalized banks in the 80s and 90s created fertile ground for willful defaults. This was fueled by political meddling and a lack of accountability.
• Easy credit during the economic boom in the 2000s led to reckless borrowing. This was followed by defaults as the economy cooled, worsening the NPA crisis.
• Cases like Mallya, Modi, and Choksi brought willful defaulting into sharp focus. This prompted legislative and legal action.
• Early efforts like CVC's 1998 directives and RBI's 2015 guidelines show India's commitment to tackling the issue.
• Willful defaults continue to rise, highlighting the need for even stricter measures and enforcement.

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Joint Parliamentary Committee Recommendations

In 2018, a Joint Parliamentary Committee (JPC) was constituted to examine the issue of mounting NPAs in the Indian banking system and recommend measures to tackle wilful defaulters. The JPC made several recommendations to address the issue of wilful defaulting, which included:

• The JPC recommended that stricter action should be taken against wilful defaulters, including criminal proceedings, asset seizures, and penalties.
• The JPC suggested that the recovery process for NPAs should be speeded up through the establishment of special courts and tribunals.
• The JPC recommended that banks should be held accountable for lending decisions and that they should conduct proper due diligence before sanctioning loans.
• The JPC recommended that measures should be taken to protect whistleblowers who report cases of wilful defaulting.
• The JPC suggested that credit rating agencies should be strengthened and made more accountable to prevent instances of wilful defaulting.

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Laws dealing with Wilful Defaulters

• SARFAESI Act of 2002: If a borrower fails to provide asset information and the lender does not seize ownership of the mortgaged property within 30 days, it was updated to include a three-month punishment.
• Companies Act of 2013: The Companies Act of 2013's Sections 447 and 448 would be applicable to willful defaulters. According to Section 447, a fraud conviction carries a sentence of three times the amount involved in the crime, up to ten years in prison, a threefold fine, or both. Section 448 makes false assertions illegal.
• Banking Regulation Amendment Act of 2017: The Banking Regulation Amendment Act of 2017 grants the RBI the authority to issue instructions to banks for the resolution of stressed assets. Furthermore, The RBI is able to designate committees or authorities to advise these banks on how to handle stressed assets. The members of these committees will be approved by and/or appointed by the RBI.
• Indian Penal Code 1860: An intentional defaulter can be prosecuted under IPC sections 415 and 403. Typically, financial institutions are the ones that file criminal complaints under these statutes. Dishonest misappropriation of property is normally covered by Section 403, which states that anyone found guilty of this offence risks receiving a sentence of up to two years in prison, a fine, or both. The offence of cheating is likewise covered by Section 415.
• The Fugitive Economic Offenders Act 2018: This act's main goal was to create an entirely new structure for handling such a circumstance. The preamble of the Act states that its main objective is to bring "fugitive economic offenders to justice, which is accomplished by the attachment and subsequent disposition of property." According to SEBI, willful defaulters are also prohibited from holding board positions, raising money, or participating in capital market activities.
• Insolvency and Bankruptcy Code: The Insolvency and Bankruptcy Code of 2016 describes the creditor-in-saddle strategy, in which the interim resolution expert assumes control of the company's operations. 
  • The Insolvency and Bankruptcy Code of 2016 prohibits willful defaulters from taking part in the insolvency resolution process. 
  • The government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha that is set to replace the Insolvency and Bankruptcy Code Amendment Ordinance 2021 promulgated in April 2021.
  • It created the Pre-packaged Insolvency Resolution Process, an alternative insolvency resolution procedure for Micro, Small and Medium-Sized Enterprises (MSMEs) with Defaults up to Rs 1 crore. 
  • Within the fundamental framework of the Insolvency and Bankruptcy Code (IBC), 2016, a subcommittee of the Insolvency Law Committee (ILC) recommended a pre-pack framework in March 2021.

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Actions taken on Wilful Defaulters

A business or person who has been labelled a "wilful defaulter" must deal with the following consequences:

• No bank or financial institution shall offer the willful defaulters any extra services.
• For a period of five years starting on the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI, the owners/promoters of the companies where banks/financial institutions have discovered money-siphoning, misrepresentation, falsification of accounts, and fraudulent transactions will be prohibited from institutional financing and from floating new ventures.
• Where appropriate, the lenders may file criminal charges against willful defaulters. Banks and other financial institutions could take a proactive stance to replace the management of the unit of willfully defaulting borrowers.
• A wilful defaulter may not apply for a resolution under section 29A of the Insolvency and Bankruptcy Code, 2016, in addition.

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Conclusion

• Wilful defaulting is a critical issue that has affected the Indian banking sector for many years. It has resulted in a rise in non-performing assets (NPAs) and losses for banks and taxpayers. The problem has been exacerbated by high-profile cases of wilful defaulters who have fled the country to avoid facing legal action.
• The Indian government has taken steps to address the issue, including enacting the Insolvency and Bankruptcy Code and cracking down on wilful defaulters through legal action. However, more needs to be done to prevent wilful defaulting and increase accountability in the banking sector.
• It is crucial for regulators and banks to conduct proper due diligence before sanctioning loans and ensure that borrowers are held accountable for their actions. The protection of whistleblowers reporting cases of wilful defaulting should also be ensured, and the recovery process for NPAs should be speeded up. Furthermore, the strengthening of credit rating agencies can help to prevent instances of wilful defaulting.
• Overall, it is imperative for the government and regulators to continue taking strict action against wilful defaulters to prevent further damage to the banking sector and the wider economy. It is only through increased accountability, transparency, and efficient legal mechanisms that wilful defaulting can be effectively tackled in India.

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UPSC CSE Mains Previous Years Questions

• What is a wilful default? What measures have been taken to tackle the issue of wilful default in India? (UPSC Mains 2020)
• Explain the concept of non-performing assets (NPAs) and the problem of wilful default in India. What steps have been taken to address this issue? (UPSC Mains 2019)
• Analyze the impact of wilful default on the Indian banking sector and the economy as a whole. What measures can be taken to prevent wilful defaulting in the future? (UPSC Mains 2018)

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