an in in ndia      12.23
         (iii) or with whom funds are not available in                 company to become a board member of
                the form of assets as funds have been                  any other company as well.
                siphoned off;
         (iv) or who has sold or disposed the property           caPItal adequacy ratIo
                that was used as a security to obtain the
                loan.                                         At first sight bank is a business or industry a
                                                              segment of the service sector in any economy.
           Diversion of fund includes activities such as
                                                              But the failure of a bank may have far greater
     using short-term working capital for long-term
                                                              damaging impact on an economy than any other
     purposes, acquiring assets for which the loan was
                                                              kind of business or commercial activity. Basically,
     not meant for and transferring funds to other
                                                              modern economies are heavily dependent on banks
     entities. Siphoning of funds means that funds
     were used for purposes that were not related to          today than in the past—banks are today called the
     the borrower and which could affect the financial        backbone of economies. Healthy functioning of
     health of the entity.                                    banks is today essential for the proper functioning
                                                              of an economy. As credit creation (i.e., loan
           However, a lending institution cannot term
                                                              disbursals) of banks are highly risky business, the
     an entity or an individual a wilful defaulter for
     a one-off case of default and needs to take into         depositors’ money depends on the banks’ quality
     account the repayment track record. The default          of lending. More importantly, the whole payment
     should be established to be intentional and the          system, public as well as private, depends on banks.
     defaulter should be informed about the same. The         A bank’s failure has the potential of creating chaos
     defaulter should also be given a chance to clarify       in an economy. This is why governments of the
     his stand on the issue. Also, the default amount         world pay special attention to the regulatory
     needs to be at least Rs.25 lakh to be included in        aspects of the banks. Every regulatory provision
     the category of wilful defaults.                         for banks tries to achieve a simple equation, i.e.,
           If an entity’s or individual’s name figures in the “how the banks should maximise their credit
     list of wilful defaulters, the following restrictions    creation by minimising the risk and continue
     get in action on them—                                   functioning permanently”. In the banking
           (i) Barred from participating in the capital       business risks are always there and cannot be made
                market.                                       ‘zero’—as any loan forwarded to any individual
                                                              or firm (irrespective of their credit-worthiness) has
          (ii) Barred from availing any further banking
                                                              the risk of turning out to be a bad debt (i.e., NPA
                facilities and to access financial
                                                              in India)—the probability of this being 50 per
                institutions for five years for the purpose
                                                              cent. But banks must function so that economies
                of starting a new venture.
                                                              can function. Finally, the central banks of the
         (iii) The lenders can initiate the process of
                                                              world started devising tools to minimise the risks
                recovery with full vigour and can even
                                                              of banking at one hand and providing cushions
                initiate criminal proceedings, if required.
                                                              (shock-absorbers) to the banks at the other hand
         (iv) The lending institutions may not allow          so that banks do not go bust (i.e., shut down
                any person related to the defaulting
                                                              after becoming bankrupt). Providing cushion/