RBI Proposes Transparent Mechanism For Declaring Borrowers As Wilful Defaulters

The Reserve Bank of India (RBI) is proposing a transparent mechanism to identify and declare borrowers as wilful defaulters.

Additionally, the RBI aims to expand the definition and make it more difficult for such defaulters to obtain funding for future ventures.

This move by the RBI follows a Supreme Court ruling earlier this year, which mandated that lenders must give borrowers an opportunity to present their case before declaring an account as fraudulent.

To ensure a foolproof system, the central bank has established a detailed process for identification. It has proposed that all accounts with an outstanding balance of Rs 25 lakh or more should be examined for identification.

"The primary objective of these directions is to provide for a non-discriminatory and transparent procedure, while complying with the principles of natural justice for classifying a borrower as a wilful defaulter by the lenders," said the RBI, which issued a draft master direction on treatment of wilful defaulters and large defaulters.

In addition to wilful defaulters, the RBI is also focusing on large defaulters, defined as those with an outstanding amount of Rs 1 crore or more.

As per RBI data, there were approximately 16,000 cases of wilful default involving nearly Rs 3.5 lakh crore by the end of 2022.

The scope for regulated entities to classify borrowers as wilful defaulters is expanded by the draft circular. It provides a broader definition of wilful default and improves the identification process. It mandates a review and finalisation of a wilful default within six months of an account being classified as a non-performing asset (NPA).

As per the central bank, both borrowers and guarantors can be considered "wilful defaulters" if they fail to pay even when they have the capacity to fulfill their obligations.

Additionally, borrowers who divert or siphon off funds and/or dispose of collateralized assets without the knowledge of the lenders will also be categorized as wilful defaulters.

If a borrower has the ability to infuse equity but fails to fulfill their commitment to the lender, it will be treated as a wilful default.

Lenders, including banks and non-banking finance companies, are prohibited from granting any additional credit facility to wilful defaulters or their associated entities.

Furthermore, wilful defaulters are not eligible for debt restructuring.

"The directions also aim to put in place a system to disseminate credit information about wilful defaulters for cautioning lenders to ensure that further institutional finance is not made available to them," the RBI said.

Lenders have been told to formulate a non-discriminatory board-approved policy that clearly outlines the criteria for publishing photographs of persons classified as wilful defaulters.

As a condition for extending credit facilities to borrowers, lenders must include a covenant in the agreement stating that they will not appoint any person from the list of wilful defaulters to their board, according to RBI.