On Thursday, the Reserve Bank of India (RBI) released initial guidelines regarding the classification of wilful defaulters, broadening the scope of the definition and requiring financial institutions to complete the process of identifying and labeling borrowers as wilful defaulters within six months of loan defaults.
In addition to referencing various court decisions, including those from high courts and the Supreme Court, the RBI noted that it had gathered input from banks and other stakeholders on this matter. These proposed changes would be applicable to banks, non-banking financial companies (NBFCs), and all-India financial institutions such as the Export-Import Bank of India (Exim Bank) and the National Bank for Agriculture and Rural Development (Nabard).
A borrower can be classified as a wilful defaulter if they fail to repay despite having the financial means to do so. This includes individuals who have diverted or misappropriated borrowed funds. Furthermore, those who fail to inject equity despite having the capability to do so would also fall within this classification. This would encompass outstanding loans of ₹25 lakh or more.
The RBI specifies that financial institutions must complete the process of classifying and designating a borrower as a wilful defaulter within six months of the loan being classified as non-performing. Loans are considered non-performing when repayments are overdue for more than 90 days.
However, some bankers express reservations about the RBI imposing a deadline for the classification of borrowers as wilful defaulters. A senior private sector banker noted that it takes over six months just to conduct a forensic audit and hold personal hearings. Delays can also occur due to adjournments in these hearings, and convening consortium meetings and reaching agreements can be a time-consuming process.
According to the draft guidelines, wilful defaulters will be ineligible for new loans for one year after their removal from the wilful defaulter list. This restriction applies to all entities regulated by the RBI.
Under these preliminary guidelines, the RBI outlines that lenders must investigate cases of wilful default through an identification committee. If this committee determines that wilful default has occurred, it will issue a show-cause notice to the parties involved.
The borrower, guarantor, promoter, and the director responsible for the entity\’s management will then be informed of the intent to classify them as wilful defaulters, along with the reasons for this decision.
Lenders must provide those involved with an opportunity to submit written representations against the proposal to classify them as wilful defaulters within approximately 15 days to the review committee. The review committee will evaluate the proposal along with the written representations and provide a personal hearing.
The RBI draft circular also addresses the treatment of wilful default loans sold to asset reconstruction companies (ARCs) and their status under the Insolvency and Bankruptcy Code.
The draft circular mandates lenders to scrutinize borrowers from the perspective of wilful default before transferring loans to other lenders and ARCs. In cases where wilful default is established, the RBI specifies that the lender must report it to credit information companies before selling the asset.
The RBI has invited comments and feedback from regulated entities and other stakeholders until October 31st.