The Reserve Bank of India's new guidelines on wilful defaulters will make bankers cautious and bring more credit discipline in market, says SL Bansal, chairman and managing director, OBC. As per new rules, guarantors, who refuse to fulfil their obligations to banks despite having adequate resources, will also be treated as wilful defaulters.
In a circular, the central bank said that cases where guarantees furnished by the companies within the Group on behalf of the willfully defaulting units are not honoured when invoked by the banks and financial institutions, such Group companies should also be reckoned as wilful defaulters.
Bansal expects these guidelines to be implemented prospectively.
Below is the verbatim transcript of SL Bansal’s interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy
Latha: What exactly is game changing in yesterday’s clarification?
A: Now the first change what is happening is for namesake people are saying it is a group company and when the stress comes then they wash off their hands and they say it is different management, independent company so we are not responsible. So for all those cases where the group companies extend guarantees, they will be responsible and naturally they will be falling in the ambit of the wilful default.
Secondly, all guarantors they were asking the banks to first exhaust all your means against the borrower and unless you dispose off all the assets which are available with you we are not held accountable. So these provisions will not hold good and the banks can straightaway proceed against the guarantor. Straightaway in the sense first notice will serve to the borrower and if the borrower refuses, if the guarantor has means then he cannot refuse simply on the ground that you first exhaust your means against the borrowers. So this will be a big game changer and a big sigh of relief for the banks.
Sonia: How will this affect credit growth in anyway, will it impact the way the banks lend?
A: It is a tricky situation. Credit growth doesn’t mean that we go on lending to the companies who are defaulting on the other side. So lot of credit discipline will come and bankers will be cautious naturally in selecting companies and the promoters of course will be very selective when they will promote different companies and extend guarantees left and right without thinking. So lot of discipline will be introduced in the system for the economy as a whole.
Latha: I am wondering, an entity which says that you first exhaust the options with the defaulter himself before you come to me is making a legitimate point of view isn’t it. Assuming that the guarantee was given in good faith, now guarantors will not come forward. Will that not mean a problem when new loans are sanctioned?
A: We are also lending in good faith so you cannot say that the guarantor is giving the guarantees in good faith. He is also expected to analyse the financial position and keep a watch on the performance of the company on an ongoing basis the way banks are expected to. Now it will cast a lot of responsibility on the banker also because when we consider the enhancement in the limit then naturally we will be taking guarantor into confidence also and ultimately it will be good for the banking system and economy as a whole.
Latha: The definition of ‘key management personnel’ is very loose. I would assume a CFO is involved, a company secretary is involved but it is still a little undefined, key management personnel. Will not this scare away a professional put him in the dock when he perhaps is not in control of the situation?
A: Lot of clarity will come, I don’t think it will be applicable for professional management, it will be applicable to only those companies which are closely held companies. Whenever there is professional management then you cannot hold CFO responsible for all these things. I think all these things will be clarified in next 48 hours.
Latha: One news paper has interpreted this to mean that if one company defaults the entire group company is a defaulter. That isn’t the case isn’t it? Only if one of the group companies guarantees the loan it is a defaulter right?
A: Yes your analysis is correct, only the group company which is extended by guarantee, they will be responsible.
Sonia: What would the impact be on the overall NPL situation and will it be easier for you to recover now?
A: All the guidelines will be applicable prospectively. I don’t think retrospectively RBI is going to implement this but going forward lot of credit discipline will be there, the promoter before approaching the bank they will also apply their mind and the bank will also try to put some condition if the group company is a weak company. So lot of improvement will take place in the system. So let us not worry unduly for the old loans and other things. Once the economy starts improving I think this NPL problem will solve on its own.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
