Wilful defaulters need not appear before bank committees

Vijaya Mallya and other wilful defaulters are no longer required to make a personal appearance before banks after Reserve Bank of India (RBI) disbanded the erstwhile Grievance Redressal Committee (GRC).

This means the wilful defaulter, who earlier had an option to appear with his team and explain his stand, does not have that option in the new structure.

The move follows the court row between Kingfisher and Kolkata-based United Bank of India, where the court had ruled in favour of the company quashing the decision of the lender.

RBI has now asked banks to set up two committees -- declaration committee headed by an executive director or deputy managing director, and a review committee headed by the chairman. Between these two committees, the wilful defaulter tag needs to be finalised.

A senior banker told dna, "We have approached the RBI for further fine tuning the legal binding of these committees so that companies do not approach courts for stay and delay the banks' decisions."

The issue all along had been about Mallya appearing before the GRC along with an external legal counsel which the bank opposed, saying the regulation permits only the borrower and internal members and no external members. Kingfisher then opposed the bank's GRC saying that the number of its members exceeded the regulatory requirement of three members.

The new declaration committee will be headed by an executive director or a deputy managing director and the review committee will be headed by chairman or CMD. According to the new structure, banks are now putting in place two committees.

The declaration committee checks the merits of the case, gives a showcase notice to defaulter giving him 15 days to explain his stand. Once his explanation is received, they can declare the borrower a wilful defaulter. The review committee, the highest decision making body in these cases, can review the case after examining all the legal angles and confirm the ruling of the declaration committee.

In December 2014, Calcutta High Court quashed the decisions of the identification committee of United Bank of India and the grievance redressal committee. The ruling was in favour of Kingfisher on technical grounds. The high court said the grievance redressal committee (which decides on whether or not a borrower is declared a wilful defaulter) was not constituted according to the regulatory guidelines. Therefore, the committee's decision to declare Kingfisher a wilful defaulter was defeated.

The technical flaw of the bank's grievance redressal committee was that it had four members instead of three -- chairman, a chief general manager and two general managers being a part of it. This is in excess of the number of three personnel prescribed in regulation 3(i) of the master circular on wilful defaulters, issued by the central bank.

The court ruled that the decision taken by the grievance redressal committee is null and void. Consequently, all steps taken by the bank subsequent to such so-called identification are also null and void. Significantly, the grievance redressal committee also comprised four members. "This is also in violation of regulation 3(iii) of the master circular issued by RBI," the court order said.

According to the master circular, a decision on whether or not to classify a borrower a wilful defaulter should be entrusted to an identification committee (a panel of higher functionaries, headed by the executive director and comprising two general managers or deputy general managers, as decided by the bank's board). It added if a borrower was identified as a wilful defaulter, she/he should be provided reasonable time (say, 15 days) for making a representation against the decision to the grievance redressal committee, headed by the chairman and comprising two other senior officials.