RBI to banks, NBFCs: Check wilful defaulters in NPA accounts with outstanding amount of Rs 25 lakh or more 

The Reserve Bank of India has told banks and NBFCs to be watchful of 'wilful default' aspect in all non-performing asset accounts with outstanding amounts of Rs 25 lakh and above. This was mentioned in RBI's latest Master Direction on the Treatment of Wilful Defaulters and Large Defaulters and will be applicable to all regulated entities. These directions will come into force after 90 days from their issuance today, the RBI said. 

The RBI said a lender will identify and classify a person as a 'wilful defaulter' by following a specified procedure. The evidence of wilful default will be examined by an identification committee, according to the direction. 'Wilful defaulter' means a borrower or a guarantor who has committed wilful default, and the outstanding amount is Rs 25 lakh and above.

The RBI said it would also apply if the borrower has diverted the funds availed under the credit facility from a lender, or siphoned off the funds availed under the credit facility or even disposed of immovable or movable assets provided for the purpose of securing the credit facility without the approval of the lender. 

It would also include cases where the borrower or the promoter has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity.

"The lender shall examine the 'wilful default' aspect in all NPA accounts with an outstanding amount of Rs 25 lakh and above...from time to time," it said.

The RBI has mandated a structured mechanism for identifying and classifying wilful defaulters. This process involves an examination by an Identification Committee, which must review the borrower's track record to ensure that the default was intentional and deliberate. 

If wilful default is suspected, a show-cause notice is issued to the borrower, guarantor, promoter, or director, allowing them 21 days to respond, providing an opportunity to present their case.

If a wilful default is observed in the internal preliminary screening, the lenders will complete the process of classification/declaring the borrower as a wilful defaulter within six months of the account being classified as NPA.

"No additional credit facility shall be granted by any lender to a wilful defaulter or any entity with which a wilful defaulter is associated," it added.

The decision to classify an individual or entity as a wilful defaulter rests with a Review Committee, which will consider the recommendations of the Identification Committee, the submissions made by the borrower, and any written representations and personal hearing before taking the final call.

“The Review Committee shall provide an opportunity for a personal hearing also to the borrower/ guarantor/ promoter/ director/ persons who are in charge and responsible for the management of the affairs of the entity. However, if the opportunity is not availed or if the personal hearing is not attended by the borrower/ guarantor/ promoter/ director/ persons who are in charge and responsible for the management of the affairs of the entity, the Review Committee shall, after assessing the facts or material on record, including written representation, if any, consider the proposal of the Identification Committee and take a decision,” RBI said.

The bar on the additional credit facility to a wilful defaulter or any entity with which a wilful defaulter is associated would be effective for one year after the name of the wilful defaulter has been removed from the List of Wilful Defaulters (LWD) by the lender.

"The RBI's new directives for identifying and treating wilful and large defaulters mark a significant shift in debt collection practices. By setting clearer guidelines for regulated entities, including asset reconstruction and credit information companies, the RBI aims to enhance transparency and accountability. This move will likely streamline the default reporting process, making it more difficult for persistent defaulters to evade scrutiny. It is further going to enable banks, NBFCs, and financial institutions to contribute to bringing down the Rs 3.6 lakh crore outstanding wilful default as reported on 31 March by a report by Transunion CIBIL. For the industry, it represents a crucial step toward more disciplined credit management and could potentially improve recovery rates by holding defaulters more accountable. Overall, these measures are expected to instill greater confidence among creditors and contribute to a more robust financial ecosystem," said Mayank Khera, Cofounder & COO, Credgenics.