The Reserve Bank of India (RBI) has reported a sharp decline in gross non-performing assets (NPAs), or bad loans, in the banking system in the last two years, but wilful defaults have shot up with more legacy loan accounts now getting added to the wilful default category. There has been a rise of 38.50 per cent, or Rs 94,000 crore, in wilful defaults in the last two years, reflecting the gaps in loan appraisals and risk management in the banking sector. There were 15,778 wilful default accounts involving an amount of Rs 340,570 crore as of December 2022 as against 14,206 accounts involving Rs 285,583 crore a year ago in December 2021 and 12,911 accounts for Rs 245,888 crore in December 2020, according to Transunion Cibil, a credit information company registered with the RBI. As per the Reserve Bank of India’s (RBI) classification, a ‘wilful default’ would be deemed to have occurred if the borrower has defaulted in meeting their repayment obligations to the lender even when they have the capacity to honour the said obligations. “This (higher wilful default number) has nothing to do with the present. This is all a catch up of the past. So, it is not for the defaults today but it is the default of the past and where recovery and insolvency actions are still going on,” said an official of a bank. However, according to the RBI’s ‘Report on trends and progress of banking’, overall NPAs – loans where principal or interest payment remained overdue for a period of 90 days - have fallen from 7.3 per cent (of total advances) in 2021 to 5 per cent by September 2022. In absolute numbers, gross NPAs (which also include wilful defaults) of banks reduced by 19.5 per cent to Rs 6.1 lakh crore as of December 31, 2022 as against Rs 7.5 lakh crore over a year ago. State Bank of India (SBI) leads with 1,883 wilful default accounts for Rs 79,296 crore, followed by PNB at Rs 38,360 crore, Union Bank of India Rs 35,266 crore, IDBI Bank Rs 23,601 crore and Bank of Baroda Rs 23,879 crore, according to data from Cibil website. Public sector banks account for 85 per cent of the wilful defaults at Rs 292,666 crore, indicating the reluctance of borrowers to repay bank loans despite having the capacity to make the payment. Among financial institutions, HUDCO had 130 wilful default accounts for Rs 12,211 crore. Private banks reported 1,523 accounts for Rs 27,431 crore as of December 2022. A wilful default happens when the borrower has not utilised the finance from the lender for the specific purpose for which finance was availed, and has diverted the funds for other purposes, or siphoned off funds, or disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank. “A wilful default means a promoter who had borrowed money has defaulted wilfully. When he had the capacity to pay, he did not pay, took out the money and siphoned off. Wilful defaulters are in all segments but only large cases are being reported. Mostly wilful default is examined in accounts above Rs 25 lakh and above,” bankers said. What you are seeing as a decline in NPAs is mainly because corporate loans book where the bad loans are coming down, bankers said. “For most of the lenders, NPAs in the Rs 100 crore and above category have become negligible. Banks are seeing NPAs in the loans below Rs 25 lakh category,” said a public sector lender. Wilful default numbers will remain elevated for next one year. After that the numbers will decline as the recovery process would have been completed and legacy NPAs would have been resolved. “Recognition of NPAs is already over but recovery actions are still happening. These are all part of the recovery actions. Once this is over then we should see it (wilful default number) ebbing away,” said another banker. PSU banks accounted for 75.9% of aggregate gross NPAs compared to 61.9% of advances. Overall, the stress level of the banking sector has reduced as their outstanding SMAs (special mention accounts) and restructuring book have reduced significantly in Q3FY23, indicative of improving asset quality. This comes after covid pandemic and associated business disruptions have led to an increase in restructured standard assets over the past two years, according to Care Ratings.
