Default and Misuse of Funds Quiz

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Questions and Answers

What action by a unit would result in the penal measures stipulated in the text?

Defaulting in meeting payment obligations without any malicious intent

Repaying the lender on time and using funds as intended

Disposing of assets with the knowledge and approval of the bank/lender

Siphoning off funds not utilized for the specific purpose of finance (correct)

What is the threshold for outstanding balance that would attract penal measures as per the Central Vigilance Commission's limit?

₹10,000 or more

₹1 crore or more

₹25 lakh or more (correct)

₹50,000 or more

How does the Central Vigilance Commission's limit relate to 'siphoning' of funds according to the text?

It is not related to siphoning of funds

It sets a reporting limit for default cases involving fund siphoning (correct)

It applies only to movable fixed assets and not funds

It limits the actions against wilful defaulters without fund diversion

What measure is taken by Reserve Bank of India to prevent wilful defaulters from accessing capital markets?

Sending a list of wilful defaulters to Securities and Exchange Board of India Signup and view all the answers

What action by a unit could lead to being identified as a wilful defaulter based on the text?

Disposing of assets securing a term loan without bank/lender knowledge Signup and view all the answers

What is the consequence for wilful defaulters under RBI guidelines regarding access to capital markets?

They are restricted from accessing capital markets Signup and view all the answers

What is the main objective of restructuring as mentioned in the text?

To preserve economic value of units Signup and view all the answers

What would a common Data Quality Index help UCBs with?

Identifying gaps in their data Signup and view all the answers

What should scheduled UCBs do in cases of wilful defaults below ₹1 crore?

Take appropriate action, including legal action Signup and view all the answers

Why should UCBs consider best practices detailed in Appendix - C?

To enhance data quality Signup and view all the answers

What is the recommended time period for UCBs to work on improving data quality?

Six months Signup and view all the answers

What is a requirement for UCBs to obtain certification from auditors as per the text?

Incorporating appropriate covenants in the loan agreements Signup and view all the answers

What kind of cases are exempt from the prudential guidelines on restructuring?

Cases resulting from natural calamities Signup and view all the answers

What is the purpose of adopting a Data Quality Index for UCBs?

Assessing the quality of data submissions Signup and view all the answers

What is the significance of quick detection of weaknesses in accounts during restructuring?

It helps preserve economic value of units Signup and view all the answers

Under what conditions should UCBs review their policies as per the text?

With board approval Signup and view all the answers

What actions are recommended for UCBs in cases of wilful defaults above ₹1 crore?

File suits and examine cheating/fraud cases Signup and view all the answers

What should banks do in consultation with their legal departments as per the text?

Get the documentation settled as per revised guidelines Signup and view all the answers

What is a key requirement for valuers conducting property valuations?

Being professionally qualified and independent Signup and view all the answers

What is the minimum valuation threshold that requires banks to obtain two Independent Valuation Reports?

₹50 crore Signup and view all the answers

What should a bank's revaluation policy for fixed assets cover based on the text?

Procedure for asset identification and sale of revalued assets Signup and view all the answers

What should the banks have in place for valuation of properties according to the text?

Board approved policy Signup and view all the answers

Why is it important for valuers to not have a direct or indirect interest in the properties they evaluate?

To maintain independence and objectivity Signup and view all the answers

What is the primary measure that scheduled UCBs should take against wilful defaulters?

Deny any additional facilities or financing Signup and view all the answers

For how long should entrepreneurs/promoters involved in siphoning/diversion of funds be debarred from institutional finance for new ventures?

5 years from the date of being listed as a wilful defaulter Signup and view all the answers

What action should banks take regarding the legal process against wilful defaulters?

Initiate legal proceedings and foreclosure expeditiously Signup and view all the answers

Under what circumstances can criminal proceedings be initiated against wilful defaulters?

Criminal proceedings can be initiated wherever necessary Signup and view all the answers

What approach should banks adopt regarding the management of wilfully defaulting borrower units?

Adopt a proactive approach for a change of management Signup and view all the answers

What is the primary concern regarding the penal provisions against wilful defaulters?

Ensuring that the provisions are not misused Signup and view all the answers

Study Notes

Wilful Defaulters

A unit is considered a wilful defaulter if it defaults on payment/repayment obligations to a lender and diverts funds for other purposes or disposes of movable/immovable property given as collateral without the lender's knowledge.
The unit must have an outstanding balance of ₹25 lakh or more to be considered a wilful defaulter.

Penal Measures

Wilful defaulters will be denied access to capital markets.
A list of wilful defaulters will be forwarded to the Securities and Exchange Board of India.
Scheduled UCBs will take measures against wilful defaulters, including:
- No additional facilities will be granted.
- Entrepreneurs/promoters of companies involved in siphoning/diversion of funds will be debarred from institutional finance for 5 years.
- Legal process, including foreclosure of loans and criminal proceedings, will be initiated expeditiously.
- Banks may adopt a proactive approach for a change of Management of the wilfully defaulting borrower unit.

Data Quality Index

A common Data Quality Index will assist UCBs in determining gaps in their data and improving performance over time.
UCBs will adopt this index for assessing data quality and minimizing data rejections within 6 months.

Best Practices for UCBs

UCBs should formulate or review policies and procedures under the Credit Information Companies (Regulation) Act, 2005, with the approval of their Board of Directors.
UCBs should take into account best practices as detailed in Appendix - C.

Filing of Suits to Recover Dues

Scheduled UCBs should examine all cases of wilful defaults of ₹1 crore and above and file suits in such cases.
In cases involving amounts below ₹1 crore, banks should take appropriate action, including legal action, against the defaulting borrowers.

Prudential Guidelines on Restructuring of Advances

The basic objective of restructuring is to preserve economic value of units and not evergreening of problem accounts.
Banks and borrowers should carefully assess viability, detect weaknesses in accounts, and implement restructuring packages in a time-bound manner.

Valuation of Properties

Banks should have a Board-approved policy in place for valuation of properties, including collaterals accepted for their exposures.
Valuation should be done by independent valuers, and minimum two Independent Valuation Reports are required for properties valued at ₹50 crore or above.

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Test your knowledge on scenarios where a unit defaults in meeting payment obligations and misuses funds received from a lender. Explore cases where assets given as security are disposed of or removed without authorization.