RBI Notification

Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters

The Reserve Bank of India’s (RBI) Treatment of Wilful Defaulters and Large Defaulters Directions, 2023, is a comprehensive guide that outlines the procedures for identifying and classifying wilful defaulters and reporting credit information on large defaulters. The primary objective of these Directions is to provide 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. 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 importance of these Directions cannot be overstated, as wilful defaulters pose a significant risk to the financial system. When borrowers default on their loans, it can lead to a chain reaction of defaults, which can ultimately result in the collapse of financial institutions. The RBI’s Directions provide a framework for lenders to identify and classify wilful defaulters, which helps mitigate the financial instability risk. Additionally, reporting and disseminating credit information on large defaulters helps to caution lenders and prevent them from extending further credit to borrowers with a history of defaulting on their loans.

Overall, the RBI’s Treatment of Wilful Defaulters and Large Defaulters Directions, 2023, is an essential document that provides clear guidelines for lenders to follow when dealing with wilful defaulters and large defaulters. By following these guidelines, lenders can help ensure the financial system’s stability and protect themselves from the risks associated with defaulting borrowers.

CHAPTER I

These Directions ARE called the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2023 and will come into force 90 days after placing it on the website of the Reserve Bank.

Applicability

• The rules for dealing with wilful defaulters in these Directions apply to the entities defined as ‘lenders’ within these Directions.
• Asset Reconstruction Companies (ARCs) and Credit Information Companies (CICs) are only bound by these Directions in terms of reporting requirements outlined in Chapter III.
• The restrictions on extending further financial assistance to wilful defaulters apply to all entities regulated by the Reserve Bank, regardless of whether they fit the definition of ‘lender’ as outlined in these Directions.
• The guidelines concerning large defaulters, as outlined in these Directions, apply to all entities regulated by the Reserve Bank, irrespective of whether they are categorized as ‘lenders’ as per these Directions or not.

Some Important definitions

Lender: means an AIFI, a bank, or NBFC which has granted a credit facilityto the borrower.

Large defaulter: means a defaulter with an outstanding amount of ₹1 crore and above and whose account has been classified as doubtful or loss, in accordance with the instructions issued by the Reserve Bank in Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated October 1, 2021 (as amended from time to time)

Wilful defaulter means

(i) a borrower or a guarantor who has committed wilful default and the outstanding amount is ₹25 lakh and above, or as may be notified by the Reserve Bank of India from time to time, and

(ii) where the borrower committing the wilful default is a company, its promoters and the director(s) associated at the time of default, and in case of entity (other than companies), persons who are in charge and responsible for the management of the affairs of the entity.

CHAPTER II

Mechanism for Identification and Classification of Wilful Defaulters

When a lender suspects that an individual or entity has deliberately defaulted on their financial obligations, they establish an Identification Committee to review the evidence of this wilful default. If the Identification Committee finds substantial evidence, they issue a show-cause notice to the borrower, guarantor, promoter, director, or those responsible for managing the entity, seeking their explanations. After considering these submissions and being satisfied with the evidence, the Identification Committee proposes the classification of the defaulter to a Review Committee, providing clear reasons in writing. The defaulter is informed of this proposal and given an opportunity to respond in writing. The Review Committee may even offer a personal hearing, but if this opportunity is not utilized, they make a decision based on the available facts and material. The Review Committee issues a reasoned order, which is communicated to the alleged wilful defaulter. If the Identification Committee concludes that no wilful default occurred, there’s no need for the Review Committee’s involvement.

Review of accounts for identification of wilful default

Lenders are required to review and assess the ‘wilful default’ status in all accounts with an outstanding amount of ₹25 lakh and above. According to RBI guidelines, this assessment should be completed within six months from the time the account is categorized as a Non-Performing Asset (NPA).

For accounts where ‘Wilful default’ wasn’t initially detected, these cases should be re-examined periodically based on the lender’s board-approved policy. The lender’s board will determine the specific frequency for this re-examination.

Specific measures against wilful defaulters

Criminal Action: Lenders can consider taking legal action against wilful defaulters under applicable laws, depending on the circumstances of each case.

Publishing of Photographs: Lenders must create a board-approved policy for publishing photographs of wilful defaulters.

Penal Measures:

• Debarment from Institutional Finance: Wilful defaulters or entities associated with them will not receive additional credit facilities for one year after their name is removed from the List of Wilful Defaulters (LWD). Additionally, no credit facility for new ventures associated with wilful defaulters will be granted for five years after removal from LWD.
• Ineligible for Restructuring: Wilful defaulters cannot seek credit facility restructuring.
• Covenant Incorporation: Lenders must include an agreement clause stating that they will not allow a person listed in LWD on the board of the borrower. If such a person is found on the board, the lender must take steps for their removal within 90 days, and no new credit facilities can be extended to that borrower.

Liability of a Guarantor

A guarantor’s liability is typically equal to that of the principal debtor unless the contract states otherwise. Lenders can take action against the guarantor for repayment without first pursuing remedies against the principal debtor in the event of default. The guarantor becomes immediately liable when a lender makes a claim due to the principal debtor’s default, and refusal to comply may lead to classification as a wilful defaulter.

CHAPTER III

Reporting and Dissemination of Credit Information on Large Defaulters

All regulated entities, including lenders, are required to submit monthly information to credit information companies (CICs) about large defaulters, encompassing accounts where legal suits have been filed and those where no suits have been initiated. The ₹1 crore cut-off point for these accounts should include any unapplied interest, and in cases of suits, it relates to the suit-filed amount. CICs must grant access to the list of non-suit-filed accounts of large defaulters to all credit institutions defined under the Credit Information Companies (Regulation) Act, 2005, and they must display the list of suit-filed accounts of large defaulters on their websites.

Reporting and Dissemination of Credit Information on Wilful Defaulters

All lenders should provide monthly updates to credit information companies (CICs) regarding wilful defaulters, including suit-filed and non-suit-filed accounts in the List of Wilful Defaulters (LWD). When a wilful defaulter’s outstanding amount falls below ₹25 lakh or as notified by RBI, the lender or ARC must inform CICs within 30 days. CICs are required to display these lists on their websites, and overseas branches of Indian banks should report wilful defaults unless prohibited by host country laws.

Any account should be removed from the LWD after the borrower has fully paid the compromise amount.

CHAPTER IV

Preventive Measures

Lenders shall take preventive measures during credit appraisal and verify the name of any of the directors of a company/ guarantors/ persons with the list of large defaulters/ LWD.

In cases of project financing, lenders should ensure the end use of funds by not depending solely on the certificates issued by the Chartered Accountants but also strengthen their credit risk management system and internal controls to enhance the quality of their loan portfolio. There should be a complete ‘Due Diligence’ on the part of the Lender.

Role of Statutory Auditors

In cases of falsified borrower accounts and auditor negligence, including lodging complaints with regulatory bodies, such as the National Financial Reporting Authority (NFRA)/ Institute of Chartered Accountants of India (ICAI), reporting to RBI and Indian Banks’ Association (IBA), maintaining a caution list of auditors, and enabling specific certifications for fund diversion through loan agreements. Lenders can also engage their own auditors for certifications and may commission forensic audits for accounts above a specified threshold to prevent fund diversion.

Overall, the RBI’s Treatment of Wilful Defaulters and Large Defaulters Directions, 2023, provides clear guidelines for lenders to follow when dealing with wilful defaulters and large defaulters.

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