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/