A unique way of categorising non-performing loans (NPLs) of Indian banks is as “wilful defaults” and “others”. Wilful defaulters are borrowers who are unwilling to repay their debt obligations despite having the capacity to pay back the loan. This paper is motivated by Breuer (2006) that a country’s social infrastructure -- legal, political, sociological and economic institutions -- may influence the behaviour played out in any principal-agent relationship, including banking relationships. Thus, an increase in NPLs is related to a higher degree of corruption, degree of ethnic heterogeneity, restrictions on wage and price controls, and restrictions on banks’ participation in real estate activities (Breuer, 2006). It is in this context that this paper analyses the quarterly data of wilful defaulters disclosed by the Credit Information Bureau of India Limited from June 2003 to March 2016 and examines the impact of country level governance structure on wilful defaults. A substantial number of wilful default firms are unlisted companies, private limited, partnership, and sole proprietary entities, where accounting, audit, governance structure and control systems are relatively weak. This corroborates the evidence presented by Ghoul, Guedhami, Kwok and Zheng (2016) that the adverse effect of collectivism on bank corruption is more severe in small- and medium-sized firms, privately owned firms and non-exporting firms. We argue that wilful default is a borrower’s deliberate exploitation of weak governance structure prevailing in the country, in addition to adverse macro-economic conditions. We test the empirical significance of governance and macroeconomic factors in explaining the wilful defaults of Indian commercial banks. We have considered the six governance variables as suggested by Kaufmann, Kraay, and Mastruzzi (2011) from the country-specific database released by the World Bank. Our results support that wilful defaults are significantly associated with country level governance variables and the institutional environment prevailing in the country.
