RBI tweaking definition of wilful defaulters, says Raghuram Rajan

The Reserve Bank of India (RBI) is in the process of modifying the definition of wilful defaulters to restrict the penalty only against the directors (apart from promoters) who are actually seen as culpable or actively participating in wilful default.

This is based on a recent Gujarat High Court order that struck down a part of the RBI's master circular on wilful default, which gives freedom to banks to declare all directors of a defaulting company as wilful defaulters, especially in case of diversion of funds.

"We are in the process of modifying it to include directors who are seen as culpable or actively participating or being grossly negligent in the wilful default," said RBI Governor Raghuram Rajan during a media interaction after reviewing the central bank's monetary policy where he kept interest rates on hold.

A wilful default occurs when a defaulting borrower doesn't honour an obligation despite having the capacity to pay, or siphoning of funds and disposing off assets without the knowledge of the bank.

A month ago, the RBI introduced another clause to the guidelines by banks to initiate action against the guarantors of a loan (mostly group companies) in case of a wilful default.

The wilful default guidelines have come under close scrutiny after Kolkata-based United Bank of India declared liquor baron Vijay Mallya and three other directors of the ailing Kingfisher Airlines as "wilful defaulters" in early September. The current guidelines have enough grey areas. For instance, the number of directors declared as defaulter in a single company varies among banks. In view of the rising bad loan cases, the finance ministry is also working on bringing about a law for wilful default.

As a prudential measure, the RBI is introducing a new category of non-cooperative defaulters. These are borrowers who resist paying, thereby holding up the process by approaching courts or through other means.

"This is not a legal definition but a regulatory definition, which will mean that higher capital and provisioning will be required for lending to these borrowers," said Rajan.