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Soon, Banks to Compulsorily Declare NPAs as Wilful Default or Fraud

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In an effort to tighten the noose around loan defaulters, ministry of finance has written to all banks to start bifurcating non-performing assets as either wilful default or fraud. 

Banks have also been asked to prepare a list of loan defaulters for “naming and shaming” in public.

“We have written to all public sector banks to start naming and shaming all loan defaulters by preparing a list and putting them out on public platforms. The banks also will have to start stating what kind of non-performing asset (NPA) it has encountered. 

Simply stating an NPA won’t work anymore. The banks will have to come out in public about whether it is a fraud or a wilful default,” said a top official of finance ministry on condition of anonymity.

A wilful default is a situation where the borrower has the required capacity to pay but decides not to and a fraud is when the borrower siphons off his/her money to other mode of parking say shell companies and displays a false inability to pay.

Finance ministry has also issued guidelines that banks now have to setup stressed assets management vehicle in relatively bigger branches that have chances of a default happening. The group will consist of four to five bank officials who will take care of defaults that have already happened and keeping a check on volatile loans. 

“These branches will be upgraded with the latest technology linking data points,” added the official.

In addition to this, the banks will have to setup two different departments, one for pre-sanction of loan disbursal and the other for post-sanction details.

The official informed News18 that earlier loan disbursal rules were not adhered to. “Banks used to give away without security in case of big and influential borrowers. This will stop going forward,” said the official close to the development.

Earlier, the finance ministry mandated provision of passport details of borrowers taking loans of Rs 50 crore and more to ensure a swift action in case of fraud and prevent fraudsters from fleeing the country.

The Cabinet recently approved the Fugitive Economic Offenders Bill after Nirav Modi and his uncle Mehul Choksi allegedly defrauded state-owned Punjab National Bank (PNB) of Rs 12,700 crore and left the country, refusing to cooperate with law enforcement agencies.

The proposed fugitive law aims to impound and sell assets of Nirav Modi-type escapees with a view to quickly recover dues. It also will apply to defaulters who have an outstanding of Rs 100 crore or more and have escaped from the country.

As part of drive to clean the banking system, the Finance Ministry last week had directed public sector banks (PSBs) to probe all NPA accounts of over Rs 50 crore for possible fraud and accordingly report the cases to CBI.

Besides, the ministry had asked banks to monitor loans above Rs 250 crore and red flags whenever the original covenants of the loans are violated. This was spelt out as part of 6-point-reform measures announced for PSBs in January.