India clamps down on 'wilful' loan defaulters

MUMBAI - Kemrock Industries and Exports owns a golf course near its plant in western India and its chairman, Mr Kalpesh Patel, talks of the high salaries he pays employees.

Still, the company has defaulted on loan payments of about US$250 million (S$314 million) and Mr Patel's banks, frustrated that they are unable to seize assets as he fights them in court, say they want to declare him a "wilful defaulter", a fast-growing category in India as bad loans mount.

The prevalence of so-called "wilful" 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 recapitalise state banks.

The Reserve Bank of India (RBI) defines a wilful 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 concern 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 Mr Sharad Bhatia, president of stressed assets management at Axis Bank, India's No.3 private sector lender, which has filed a lawsuit against Kemrock in the western city of Ahmedabad to try to seize assets.

"The defaulters' ability to manage the system is much better than banks', so they can get away easily," he added.

State-run Allahabad Bank is also owed money by Kemrock and said it was trying to get it declared a wilful 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 wilful defaults. Tackling the problem is difficult in a country that lacks a bankruptcy law and has notoriously clogged courts.

The authorities have asked state banks to file police complaints against wilful defaulters or move to take over company managements, Financial Services Secretary Rajiv Takru said last month. State banks have also been asked to set up loan recovery departments, if they do not already have them, and tighten procedures for new loans.

Bad loans larger than 2.5 million rupees (S$50,350) at state banks and classified by the RBI as "wilful" totalled 1.2 trillion rupees at the end of June, up 18 times from June 2008, according to a central bank document 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-fibre components for the aerospace industry, is running at just 15 to 20 per cent capacity because banks will not extend working capital, said Mr Patel.

Mr 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 wilful defaulter, I would have run away with the money long ago," said Mr Patel, sipping coffee in a Mumbai hotel.

"I'm here, running my factory, paying salaries. I have fallen on hard times but I will turn around Kemrock."