By Ruma Dubey

This week, RBI added one more definition to the growing classification of a defaulter – Non-cooperative borrower.  Earlier it was willful defaulter. RBI is obviously trying to cover all the loopholes, first in the definition.

So who is this Non-Cooperative Borrower? As per RBI , “ 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 threshold exposure, per bank, for declaring a company as non-cooperative is set at Rs.5 crore.

This in many ways sounds similar to RBI’s earlier definition of “willful defaulter”. In layman terms, what this meant was someone who has willingly not repaid the bank loans though he/she could have. A willful default broadly covered the following:

a) Deliberate non-payment of the dues despite adequate cash flow and good networth;

b) Siphoning off of funds to the detriment of the defaulting unit;

c) Assets financed either not been purchased or been sold and proceeds have misutilised;

d) Misrepresentation / falsification of records;

e) Disposal / removal of securities without bank's knowledge;

f) Fraudulent transactions by the borrower.

Really, how different are they, as in both the cases, promoters, willingly and knowingly, despite having the funds, do not pay back the banks.  The difference is actually more technical; non-cooperative tries to cover and protect the willful defaulter loophole. In case of willful defaulter, the borrower gets a legal recourse but here, in non-cooperative, that door is closed. Also in case of willful defaulter, the onus lay on the banks to prove that the funds were indeed siphoned off. In case on non-cooperative, the tag could get affixed the moment the borrower does not provide the information sought by the lender and also if he does not provide access to collateral.

In case of willful defaulter, the effect is that the tap to all further loans, be it from any bank or even registered NBFCs, is tightly screwed shut. And it’s not just for the immediate short term; five years after this declaration, no new venture of the promoter or the company can be funded by any bank or financial institution.

And in case of non-cooperative borrower, banks are not restricted from fresh lending but it will be categorized as “substandard asset” and banks will thus have to make the provisions accordingly. Also the fresh lending bank can exert pressure on the borrower to first clear the dues of the existing banks. This, many feel will force such defaulters to first clear loans from the smaller banks, where they repay the last or do not repay at all. So what this means is that the moment someone gets tagged as non-cooperative defaulter, he is just s step away from being called a willful defaulter. Thus non-cooperative is like a precursor to willful.

There is no doubt that the RBI is trying its level best to stem rising NPAs but unless the root cause is plugged, how can such band-aid solutions help?  Large and small projects are stuck in a rut on account of various issues, essentially policy decisions pending from the govt. They have already taken debt but the project is moving nowhere, raising defaults. Unless projects start moving, NPAs will thus continue to rise. And that is where we require urgent action….