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Govt looks to tighten law on loan defaulters

Under new RBI norms, banks can take majority stake in a firm where loan repayment is not regular

Policy Pulse
Publish Date: Mar 17 2016 11:58AM | Updated Date: Mar 17 2016 3:59PM

Govt looks to tighten law on loan defaulters

 The Centre is looking to revamp laws on loan defaulters, including making wilful default a criminal offence under the Indian Penal Code and defining timelines to ensure that those with unpaid bank loans don't take recourse to repeated adjournments in debt recovery tribunals to delay payment. 

 
In addition, several other provisions, which will enable lenders to acquire shares in excess of 30% in companies where banks take charge to dispose of the company, were discussed with bankers and asset reconstruction companies. 
 
Under new RBI norms for strategic debt restructuring, banks can take majority stake in a firm where loan repayment is not regular but the current legal provisions do not explicitly allow them to acquire stake of over 30% in entities other than subsidiaries, said a banker privy to the discussions. The norms allow banks to take control of firms by converting their loans into equity and then selling their stake to another player.
 
While the proposal on treating wilful default as a criminal offence has been discussed in the past, the clauses are now being talked about in the context of the spurt in bad debt.
 
The bed debts have resulted in several lenders such as Bank of Baroda, IDBI BankBSE 1.37 % and Bank of India turning loss-making.
 
Some bankers, however, are of the view that it may not be easy to prove criminality unless they can establish that loans have been diverted or siphoned off or there are other offences such as manipulating books of accounts. "Just because someone is not cooperating does not mean that he is committing a criminal offence. Even courts may not accept that plea," said a banker dealing with a large pool of non-performing assets.
 
In recent months, banks have been busy with a spate of legal cases to declare Vijay Mallya and Kingfisher AirlinesBSE 3.03 % as wilful defaulters.
 
RBI norms allow banks to classify a borrower as a wilful defaulter if he defaults in loan payment despite having the capacity to pay or has diverted the funds or has defaulted in repayment and has also disposed of assets given as security without the bank's knowledge. 
 
Managing risk and recovery of loans was one of the key themes at the Gyan Sangam, the annual retreat of banks, government and RBI earlier this month. Sources said there have been discussions around bringing agricultural land for commercial loans under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, the law meant to aid recovery of bank dues. This will help in cases where farm land has been acquired for a project but the loan repayment is a problem.