The Master Circular introduced by the RBI has given creditor banks a powerful weapon for resolving distressed assets by shutting out access to credit within the Indian financial system for a borrower
While the Master Circular on Wilful Defaulters has been devised to address the growing menace of overwhelming NPAs, suddenly several grey shades of this circular, have sprung out of the box, including the question on its very constitutionality and legal validity
While addressing a press conference on the bi-monthly monetary policy review, Dr. Raghuram Rajan stated that the inflation rate in India is different from the rest of the world, as the real value of the Rupee keeps changing. Therefore, the nominal value of rupee at some point has to adjust to that situation unless productivity also pulls up in the economy. There are lot of market forces which determine the fundamental value of the rupee; one such force is “investment”. It is an admitted fact that Credit depends on investment. The more the investment, the higher will be the credibility, which will create credit availability. But investment can only be made if the investor has money to invest. For facilitating and motivating such investment, the banks are there to lend money as loans to those investors. However, what will happen if such loans are not repaid? What will be the consequent effect of such bad debt on the creditor bank as well as the other borrowers?
Does it not suffice to say that the banking institutions will collapse? In the present scenario, the rampant siphoning of funds and defaults in the repayment of loans is playing with the tolerance of the RBI. The growing trends of Non-Performing Assets (NPAs) at an alarming rate of 2.27 lakh crores in 2014 as against 1.64 lakh crores in 2013 and approx 26,000 crores’ dues yet to be recovered by the banks demanded interference of the apex financial institution into the probe.
As a result of this, the RBI in its stringent step has introduced the term “wilful defaulter” by the Master Circular dated 1st July, 2013. This circular has given a powerful weapon in the hands of creditor banks for resolving distressed assets by shutting out access to credit within the Indian financial system for a borrower. As pointed out by Dr. Rajan, the objective of the Master Circular is not to stand in the way of market forces leading to surplus investments but to curb fraud and pave the way for effective investment through transparent procedure.
All these acts undertaken by the RBI are an execution of those issues and grey areas pointed out by Dr. D. Subbarao in the UPA-led government which had failed to transform into a reality because of the clash between the apex bank and the finance ministry. Dr. Rajan has managed the fallout well and rolled out further nuanced policy measures.
Although, DFS’s [Department of Financial Services] strategic interventions have significantly contributed to the reduction of Non-Performing Assets (NPAs) in Scheduled Commercial Banks (SCBs), and the gross NPAs have decreased from `10.36 lakh crore in March 2018 to `4. 75 lakh crores
in March 20242 , reflecting the efficacy of measures such as the Insolvency and Bankruptcy Code (IBC), amendments to the SARFAESI Act, and the Prudential Framework for Resolution of Stressed Assets.
Now coming to the essence of the article, it has to be seen that the term “wilful defaulter” has been defined under the circular as somebody who has essentially not used the fund for the purpose it has been borrowed or when he has not repaid when he can do so; when he has siphoned off the funds or when he disposed of the assets pledged for availing of loan without the bank’s knowledge. However, such non-payment should be deliberate. These defaulters will be liable to be debarred from all the banks for purpose of loan & advances in order to start a new venture for a considerable period of five years. With the advent of this concept, the banks started to declare wilful defaulters. It can be noted that the RBI move comes in the wake of Kingfisher Airlines along with three of its directors being declared as wilful defaulters by United Bank of India and the latter filing a writ petition in the Calcutta High Court against the bank and others, challenging the constitutional validity of the RBI Master Circular on wilful defaulters. The ex-parte decision of the grievance redressal committee constituted by UBI declaring Kingfisher and three of its directors as wilful defaulters was also challenged. However, the airline was denied relief by the Supreme Court. A two-judge bench of the Supreme Court had said that the special leave petition filed by the now crippled airline to block the decision by UBI’s grievance redressal committee had become “infructuous” in the eyes of the law. Similarly, in a recent judgement given by the Gujarat High Court, Justice Akil Kureshi and Justice J.B. Pardiawala has given the clearance nod to the Master Circular by only negating a part of the circular holding all the directors of the defaulted company as wilful defaulters, as unconstitutional.
Although, the RBI Circular dated June 8, 2023 on ‘Framework for Compromise Settlements and Technical Write-offs’, had provided safeguards to ensure that the provisions of compromise settlement with borrowers classified as fraud or wilful defaulter, are not mis-utilised, it is clear that the compromise settlement is not available to borrowers as a matter of right; rather it is a discretion to be exercised by the lenders based on their commercial judgement. On one hand, it sounds acceptable that the defaulters shall not be given a right to claim the benefit of this settlement, however, is it acceptable that the banks/lending institutions themselves can be placed on the same footing of the judiciary to decide as to who deserves the settlement benefit and who does not?
Therefore, the purpose of this article is to provide an analysis of the reasons and measures of the Master Circular as well as the consequential questions which were left unanswered by the RBI. While the Master Circular on Wilful Defaulters has been devised to address the growing menace of overwhelming NPAs, suddenly several grey shades of this circular, have sprung out of the box, including the question on its very constitutionality and legal validity. These questions have been structured and dealt in this article into the below mentioned categories.
A. Advocate or no advocate: One of the arguments against the Master Circular is that it provides an opportunity of representation but not representation through an advocate. This has created a potent ground for contentious interpretations coming from different corners of the judiciary. This dispute was quite obvious and expected, as no borrower would silently choose to embrace the tag of wilful defaulter without battling it out legally before the committee pronounces its adverse decision.
B. Is the bank judge of its own cause: In essence, there is a contractual relationship between two parties, where one of the parties to the contract, a non-state actor, is delivering a decision, which will adversely alter the financial standing of the other contracting party i.e., the borrower. Now, whether a party to the contract whose financial interest is already at stake can be expected to be completely unbiased, remains a question. This issue has been dealt clearly in the article.
C. Boycott by one is boycott by all: If one looks at the trend of the growing NPAs and the audacity of the promoters to avail loans only to make a mockery of the repayment obligation, sanctions are the need of hour.
D. Violation of Article 19(1)(G): Under this issue, a substantial question is raised that when a person has failed in one business and wilfully defaulted in clearing his debts taken for establishing that business, what would be the probability that his next venture will survive and he will generate enough money to clear even his older debts. Thus, in essence, does debarment from entering
into a new venture be concluded as violation to carry trade and profession under Article 19(1)(g) to the Constitution.
There are a lot more issues, the consequences of which are unseen. So, the legality of the Circular needs to be brushed and clarified in detail and not in a hush hush manner. It should not be guided by the whims and fancies of each and every individual perspective, but under the legality and validity of the Constitution. Therefore, the painstaking and preserving effort of the RBI in drafting such a Master Circular should not be judged according to one’s own premonition, rather it should be judged in its entirety.
Author: Pankaj Bajpai
Designation: Senior Associate
A dedicated writer/editor with more than ten years of experience in legal journalism and public relations. He has contributed various articles for international journals including IBFD, Netherland, and also covered stories for National Taxation Awards in Parliamentarian Magazines published by Niti Media Cell.
- By Raghuram Rajan, Governor, RBI at a press conference on the bi-monthly monetary policy review in Mumbai on September 30, 2014
- As per the Press Release issued by Department of Financial Services dated December 26, 2024
