The directions have been issued under Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and Credit Information Companies (Regulation) Act, 2005.
- The objective of direction is to provide for a non-discriminatory and transparent procedure for classifying a borrower as a wilful defaulter by the lenders.
- As of March 2023, 16,883 accounts involving total borrowing of Rs 3.5 lakh crore had been classified as wilful defaulters.
Introduction
The Reserve Bank of India on September 21, 2023 has issued the Draft Master Directions on Treatment of Wilful Defaulters and Large Defaulters (‘Proposed Directions’). The Directions, when finalized, will replace the existing Master circulars (referred below). The draft Directions are largely consolidating in nature, with some significant differences. Importantly, NBFCs of middle and upper layer have been brought into the framework, and additionally, as was clear from the recent circular on compromise/settlements, the tag of willful defaulter may be removed if the borrower does a compromise settlement with the lender. However, a mere sale of the loan will not cause removal of the tag, as the tag will pass on to the buyer. The draft Directions also assimilate the provisions about large defaulters, which was earlier a CIC filing requirement, and make it a part of these Directions. The Draft Directions, issued in September 2023, are yet to be notified. Therefore, in the meantime, the position on wilful defaulters is as follows: Banks to identify borrowers as wilful defaulter in accordance with the Master Circular on Wilful Defaulters AIFIs to also follow the Master Circular on Wilful Defaulters for identification of wilful defaulters HFCs are required to identify and report wilful defaulters as per Annex XVII Guidelines on Wilful Defaulters under the HFC Master Directions NBFCs are not covered under the aforesaid Master Circular and hence, cannot classify borrowers as wilful defaulters
Why a stringent framework for wilful defaulters
While a default itself is bad for a lender, where the default is backed by ability, but unwillingness to pay, it assumes a different level of seriousness. Such a borrower, and the entities that such borrower promotes or fosters, should remain deprived of further assistance from the financial system. Note that fraudulent defaulters are even a further level of seriousness, as a fraud is clearly a criminal offence. A fraudulent borrower is also a Wilful Defaulter, but vice versa need not be true. Fraudulent defaulters are covered by Master Directions on Frauds. The concept of Wilful Defaulter can be traced back to 1999 when it introduced a scheme to address Wilful Defaulters. Currently, the Master Circular dated July 01, 2015 (‘Current Circular’) is the governing framework for classifying an account as Wilful Defaulter.
Wilful defaulter: Meaning
“Wilful Default” (i) by a borrower shall be deemed to have occurred when the borrower defaults in meeting payment/ repayment obligations to the lender and any one or more of the following features are noticed: the borrower has the capacity to honour the said 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 for the purpose of securing the credit facility without the knowledge of the lender; The borrower has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment and other covenants and conditions; (ii) by a guarantor shall be deemed to have occurred if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues
Key Provisions of the Direction
- Wilful Defaulter: wilful default with outstanding amount of ₹25 lakh and above
- Wilful default occurs when borrower defaults in meeting payment/ repayment obligations to the lender and any one or more features are noticed
- borrower has the capacity to pay
- diversion of funds and siphoned off the funds,
- disposal of immovable or movable assets provided for securing credit or
- failure to infuse equity despite having the ability to do so.
- Wilful default occurs when borrower defaults in meeting payment/ repayment obligations to the lender and any one or more features are noticed
- Large defaulter: default with an outstanding amount of ₹1 crore and above, and where suit has been filed or whose account has been classified as doubtful or loss.
- Identification: Lenders have to establish Identification Committee to examine the evidence of wilful default.
The option of declaring a borrower as wilful, or is it an obligation?
The major obligations of NBFCs include:
Identification of an NPA as to whether it may fall into the category of Wilful Defaulter Having an Identification Committee, Review Committee, etc. for the process of declaration Formulating guidelines, based on their board-approved policy, for nominating authorized officers who would issue show cause notices and serve written order on behalf of the Identification Committee and Review Committee respectively. Post declaration, appropriate filing with Credit Information Companies(CICs) Internal audit system to be developed so as to specifically look into adherence to instructions for classifying a borrower as a Wilful Defaulter. Review of status of Wilful Defaulters by the audit committee Inclusion of a covenant in lending to all companies that the company shall not induct on its board a person who has been a director of a Wilful Defaulter Determining a limit/threshold in the board approved policy for the commissioning of forensic audit To complete the investigation from a Wilful Default angle in every case before transferring the credit facility Reporting of Wilful Defaulters in the List of Wilful Defaulters with CICs before transferring the credit facility Loan agreement may be amended so as to incorporate a covenant for certification by auditors with regard to the diversion/siphoning of funds Reporting of auditors with National Financial Reporting Authority/ Institute of Chartered Accountants of India in cases they are found to be negligent or deficient in conducting the audit. Reporting the details of third parties to Indian Banks Association in cases where they are found to be negligent or deficient in their work.
FAQs
What are the RBI's recent directions on the treatment of Wilful Defaulters (WD) and Large Defaulters?
The RBI’s recent directions focus on improving the management and recovery processes for wilful defaulters and large defaulters. These directions include guidelines on reporting, monitoring, and taking action against individuals or entities that deliberately fail to repay their loans or have large outstanding debts.
What defines a Wilful Defaulter according to RBI?
A wilful defaulter is an individual or entity that deliberately avoids repaying a loan despite having the ability to do so. This includes cases where borrowers use funds for purposes other than those specified in the loan agreement or where they have not cooperated in the recovery process.