RBI/2004-05/ 63
DBOD.No.DL.BC. 16 /20.16.003/2004-05
July 23, 2004
All Scheduled Commercial Banks and All Notified
All-India Financial Institutions
Dear Sir,
Checking of wilful defaults and measures against
Wilful Defaulters
Please refer to paragraph
7(b) of our circular DBOD.No.DL(W).BC. 110/20.16.003/ 2001-02 dated 30th
May 2002 in terms of which banks/Financial Institutions (FIs) were advised
to initiate various steps in order to check wilful defaults.
2. In terms of the above guidelines,
banks / FIs were advised that they should not depend entirely on the certificate
issued by the Chartered Accountants for ensuring end-use of funds and to supplement
supervision through diligence on their own part. Banks and FIs were also advised
that ensuring end-use of funds should form part of their loan policy document
and that they should put in place appropriate systems and measures therefor.
3. Besides, banks / FIs are also
required to initiate the following measures against wilful defaulters:
a) No additional facilities should be
granted by banks / FIs.
b) Entrepreneurs / promoters of companies,
where diversion of funds, siphoning of funds, misrepresentation, falsification
of accounts and fraudulent transactions have been identified by banks / FIs,
should be debarred from institutional finance from banks / FIs, Government owned
NBFCs, investment institutions, etc. for floating new ventures for a period
of 5 years from the date the name of wilful defaulter is disseminated in the
list of wilful defaulters by RBI.
c) Initiate legal proceedings and foreclosure
for recovery of dues expeditiously, wherever warranted, against the borrowers
/ guarantors.
d) Initiate criminal proceedings against
wilful defaulters wherever necessary.
e) Banks/FIs should adopt a proactive approach
for a change of management of the wilfully defaulting borrower unit, wherever
possible.
f) Incorporate a covenant in the loan agreement
with the borrowing companies stipulating that they should not induct a person
who is a director on the Board of a company which has been identified as a wilful
defaulter and that in case, such a person is found to be on the Board of the
borrower company, it would take expeditious and effective steps for removal
of the person from its Board.
4. We have once again examined comprehensively,
the issues relating to checking wilful defaults in consultation with the Standing
Technical Advisory Committee on Financial Regulation in the context of the following
recommendations of the JPC and in particular, on the need for initiating criminal
action against concerned borrowers, viz.
- it is essential that offences of breach of trust or cheating
construed to have been committed in the case of loans should be clearly defined
under the existing statutes governing the banks, providing for criminal action
in all cases where the borrowers divert the funds with malafide intentions.
- it is essential that banks closely monitor the end-use of
funds and obtain certificates from the borrowers certifying that the funds
have been used for the purpose for which these were obtained.
- Wrong certification should attract criminal action against
the borrower.
5. We agree with the recommendation of the JPC
that banks / FIs should closely monitor the end-use of funds and obtain certificates
from borrowers certifying that the funds are utilised for the purpose for which
they were obtained. In case of wrong certification by the borrowers, banks /
FIs may consider appropriate legal proceedings, including criminal action wherever
necessary, against the borrowers.
6. In this connection it is essential to recognise
that there is scope even under the existing legislations to initiate criminal
action against wilful defaulters depending upon the facts and circumstances
of the case under the provisions of Sections 403 and 415 of the Indian Penal
Code (IPC) 1860. Banks / FIs are, therefore, advised to seriously and promptly
consider initiating criminal action against wilful defaulters, wherever considered
necessary, based on the facts and circumstances of each case under the above
provisions of the IPC to comply with our instructions and the recommendations
of JPC.
7. It should also be ensured that the penal
provisions are used effectively and determinedly but after careful consideration
and due caution. Towards this end, banks / FIs are advised to put in place a
transparent mechanism, with the approval of their Board, for initiating criminal
proceedings based on the facts of individual case.
8. Banks are requested to inform the Reserve
Bank about the actions taken.
9. Reserve Bank will review the working of the
mechanism proposed in para 7 after one year with a view to improving the mechanisms
and systems in this regard.
Yours faithfully,
(C.R. Muralidharan)
Chief General Manager-in-Charge