On 30th July 2024, the Reserve Bank of India (RBI) issued a Master Directions on the Treatment of Wilful Defaulters and Large Defaulters, under which banks and Non-Banking Financial Companies (NBFCs) are required to scrutinize all Non-Performing Asset (NPA) accounts which have outstanding amounts of Rs 25 lakh and above for wilful default. These directions will come into effect after 90 days from the date of publication.
- Aim: To set up a transparent and non-discriminatory framework for classifying borrowers as “wilful defaulters” and also disseminate credit information about wilful defaulters to caution lenders against extending further finance to them.
- RBI issued these directions in exercise of powers given under section 45-L of the RBI Act, 1934, Section21, Section 35-A and Section 35-A read with Section 56 of the Banking Regulation Act, 1949 and Section 11 of the Credit Information Companies (CICs) (Regulation) Act, 2005.
Key Features:
i.Define wilful default: As per RBI’s master directions, “willful default” by a borrower will be considered to have occurred when the borrower defaults in meeting payment or repayment obligations to the lender and any one or more of the following features such as:
- The borrower has the capacity to honour the obligations;
- The borrower has diverted the funds availed under the credit facility from lender;
- The borrower has siphoned off the funds availed under the credit facility from lender;
- The borrower has disposed of immovable or movable assets given under the credit facility without the knowledge of the lender;
- The borrower intentionally failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity.
ii.Define wilful defaulter and large defaulter: The new directions defines wilful defaulter as a borrower or guarantor who has committed willful default and the outstanding amount is Rs 25 lakh and above, or as may be notified by RBI from time to time.
- Large defaulter means a defaulter which has an outstanding amount of Rs 1 crore and above, and where suit has been filed or whose account has been classified as doubtful or loss.
iii.Applicability: RBI’s new directions will be applicable to banks, NBFCs, and All India Financial Institutions (AIFIs)- the Export-Import Bank of India (EXIM Bank) and the National Bank for Agriculture and Rural Development (NABARD), Asset Reconstruction Companies (ARCs), and Credit Information Companies (CICs).
- The restrictions on further financial accommodations for willful defaulters and provisions related to large defaulters will be applicable to all entities regulated by the RBI, irrespective whether they meet the criteria of ‘lender’ specified in the Directions or not.
iv.Procedure for Identification and Classification of Wilful Defaulters: As per RBI, the evidence of willful default will have to be examined by an identification committee.
- During its examination, if committee finds that a borrower has willfully defaulted, it will issue a show-cause notice to the borrower, guarantor, promoter, director or any other person responsible for the management of the entity and they will be required to answer the concerned show cause notice within 21 days of its issuance.
- If lenders (banks) finds that a borrower has willfully defaulted on a loan, they will be required to complete the entire process of categorizing the borrower as a willful defaulter within 6 months of the account being classified as NPA.
v.Reporting of wilful defaulters and large defaulters: As per the RBI’s master directions, lenders must report matters pertaining to wilful defaulters to the CICs.
- Similarly, lenders must report matters pertaining to large defaulters to all CICs at monthly intervals which include information regarding all suit-filed accounts and non-suit filed accounts classified as doubtful or loss.
vi.Consequences on classification as wilful defaulter: As per the RBI’s master direction, the lenders will be required to frame a non-discriminatory board-approved policy which clearly lays down the criteria based on which photographs of persons classified and declared as willful defaulters shall be published.
- The directions will not lend additional credit facility to a willful defaulter or any entity with which a willful defaulter is associated for 1 year after the name of the wilful defaulter has been removed from the List of Wilful Defaulters (LWD) by the lender.
About Reserve Bank of India(RBI):
Governor– Shaktikanta Das(25th Governor of RBI)
Headquarter– Mumbai, Maharashtra
Established– 1 April, 1935
