As bad loans mount, India gets tough on ‘willful’ default

As bad loans mount, India gets tough on ‘willful’ default

4:08pm EST

By Swati Pandey

MUMBAI (Reuters) – Kemrock Industries and Exports (KEMR.NS: QuoteProfileResearchStock Buzz) owns a golf course near its plant in western India and its chairman, Kalpesh Patel, talks of the high salaries he pays employees. Still, the company has defaulted on payments for about $250 million in loans and Patel’s banks, frustrated that they are unable to seize assets as he fights them in court, say they want to declare him a “willful defaulter”, a fast-growing category in India as bad loans mount.Patel firmly denies he is such a case, saying that the business has hit lean times but he is working to turn it around.

The prevalence of so-called “willful” defaults is symptomatic of what critics say is a loose credit culture that plagues Asia’s third-biggest economy, keeping underperforming companies in business, crowding out other borrowers and leaving taxpayers on the hook to recapitalize state banks.

The Reserve Bank of India defines a willful defaulter as a borrower that is able but unwilling to pay, has diverted loan proceeds for other than their initially stated use, or has overstated profits in order to obtain a loan.

Policymakers have voiced growing about the problem in recent months, and are urging banks to get tough.

“In India, there is no stigma attached to defaulting on bank loans,” said Sharad Bhatia, president, stressed assets management, at Axis Bank (AXBK.NS: QuoteProfileResearchStock Buzz), India’s No.3 private sector lender, which has filed a lawsuit against Kemrock in the western city of Ahmedabad in an effort to seize assets.

“The defaulters’ ability to manage the system is much better than banks so they can get away easily.”

State-run Allahabad Bank (ALBK.NS: QuoteProfileResearchStock Buzz) is also owed money by Kemrock and said it was trying to get it declared a willful defaulter.

India has been alarmed by the rise in soured loans, especially at the state lenders that dominate the banking system, and wants to crack down on willful defaults. Tackling the problem is difficult in a country that lacks a bankruptcy law and has notoriously clogged courts.

Authorities have asked state banks to file police complaints against willful defaulters or move to take over company managements, Financial Services Secretary Rajiv Takru said in October. State banks have also been asked to set up loan recovery departments, if they don’t already have them, and tighten procedures for new loans.


Bad loans larger than 2.5 million rupees ($40,000) at state banks and classified by the RBI as “willful” totaled 1.2 trillion rupees ($19 billion) at the end of June, up 18 times from June 2008, according to a central bank document circulated to lenders and obtained by Reuters.

Over the same period, total bad loans at state banks rose five times to nearly 2 trillion rupees.

Kemrock, which makes carbon-fiber components for the aerospace industry, is running at just 15-20 percent capacity because banks won’t extend working capital, says Patel, who said he is talking to U.S.-based distressed debt investors in an effort to bring in funds and repay loans.

Patel told Reuters in an interview that his employees earn at least twice the rates typically paid in Vadodara, where the company is based, because he wants to attract the best talent.

“If I were a willful defaulter I would have run away with the money long back,” said Patel, sipping black sugarless coffee in a Mumbai hotel overlooking the Arabian Sea. “I’m here, running my factory, paying salaries. I have fallen on bad times but I will turn around Kemrock.”


Stressed loans in India – those categorized as bad or restructured – total $100 billion, or about 10 percent of all loans. Fitch Ratings expects that to rise to 15 percent by March 2016. The bad loan ratio of about 4.5 percent for state banks is more than double that for private sector lenders.

Frustration among lenders over rich company owners defaulting on debts grew during last year’s collapse of Kingfisher Airlines (KING.NS: QuoteProfileResearchStock Buzz). Controlling shareholder Vijay Mallya, a liquor baron who has not been named a willful defaulter by his banks, drew criticism for his flamboyant lifestyle even as the airline was unable to pay salaries.

Mallya, who has been unsuccessful in his efforts to find new investors for Kingfisher, has said that it is the company, not him personally, that owes money.

“In a Plc (public limited company) where is one man, who might be the chairman, responsible for the finances of the entire Plc? And what has it got to do with all my other businesses?,” Mallya told Reuters last year during the Indian Grand Prix weekend, where his Force India team was competing.

Two of the highest-profile recent cases of alleged willful default involve Winsome Diamonds and Jewellery (WINO.NS: QuoteProfileResearchStock Buzz) and Deccan Chronicle Holdings (DCHL.NS: QuoteProfile,ResearchStock Buzz), which between them defaulted on $2 billion and are being investigated for fraud by the federal police, bank and government officials have said.

Deccan Chronicle Vice Chairman P.K. Iyer’s mobile phone was switched off when Reuters made several attempts to reach him. Winsome Diamond could not be reached on its listed number.

In a sign of India’s toughening stance, Reserve Bank of India Governor Raghuram Rajan singled-out willful defaulters on his first day in office in September.

Company owners “do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures”, he said.

Later in September, Takru, the top official in the government’s financial services department, said the Central Bureau of Investigation was scrutinizing the 30 biggest defaults at Indian banks for any evidence that borrowers colluded with bankers for personal gain.


With no bankruptcy process and so-called fast-track courts that typically take five years to resolve a bad debt, lenders often go to great lengths to nurse defaulting accounts back to health rather than using aggressive means to collect – a practice that critics say fosters a sense of impunity among industrialists, many of whom are politically connected.

“They use the loophole in our system to drag legal cases for years together. For us, the account has become bad, but the lifestyle of the owner doesn’t change at all,” said Shubhalakshmi Panse, chairwoman of Allahabad Bank.

“These are not small companies. They dig into money from their own company, and when we move to take charge of the assets they transfer it in the name of their friends or relative or get stay orders from courts.”

To declare a willful default, a bank must set up a committee to hear the borrower’s story. If it then determines the default is “willful” it informs the central bank, which circulates a list of “willful defaulters” to lenders nationwide.

State lenders in particular are constrained from moving quickly to pursue dud loans by bureaucratic hurdles and a culture where it can be safer not to make a decision.

Paltry legal fees – state banks pay just 40,000 rupees ($630) per corporate debt recovery – mean top lawyers have little incentive to take on cases that can drag for months or longer. Private sector banks pay many times more to ensure cases get resolved more quickly, lawyers said.

“We need to become more nimble,” said Arundhati Bhattacharya, chairwoman at State Bank of India (SBI.NS:QuoteProfileResearchStock Buzz), the country’s largest lender. “It takes a long time to make decisions. The government is aware of it and we are trying to see what we can do about it.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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