RBI cracks down on wilful defaulters; sets out procedures for lenders, too

The Reserve Bank of India on Tuesday said identification of wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/ incidents even as it prescribed stringent penal measures, including bar on additional credit and restructuring, against wilful defaulters.

The central bank, in its “Master Direction on Treatment of Wilful Defaulters and Large Defaulters”, prescribed a non-discriminatory and transparent procedure for classifying a borrower as a wilful defaulter by lenders.

The procedure includes evidence of wilful default being examined by an “Identification Committee” and the former’s proposal along with the written representation received from the borrower to be considered by the “Review Committee”.

The Review Committee will 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.

The Audit Committee of the lender has to periodically review the cases of wilful default and recommend steps to be taken to prevent such occurrences and their early detection should these occur.

The review will focus on identifying root causes of wilful default and addressing deficiencies, if any, in the wilful defaulter classification process adopted by the lender.

The RBI said the lender should put in place a transparent mechanism for the entire process of identification of wilful defaulters so that the penal provisions are applied in a fair manner and the scope for discretion is obviated.

A wilful default is deemed to have occurred when a borrower defaults in meeting payment/ repayment obligations to the lender despite having capacity to honour the same, diverts/siphons off funds, disposes off assets placed as collateral, among others.

The RBI said a wilful defaulter is borrower or a guarantor who has committed wilful default and the outstanding amount is ₹25 lakh and above.

Penal Measures

Lenders have been asked to formulate a non-discriminatory board-approved policy that clearly sets out the criteria based on which the photographs of persons classified and declared as wilful defaulter will be published

While the Master Direction, which will be effective from October-end, has been drawn up keeping in view the principles of natural justice, the RBI has prescribed stringent penal measures against wilful defaulters.

The penal measures that will be implemented against wilful defaulters include: no additional credit facility to be granted by any lender to a such a borrower or any entity with which the borrower is associated; and bar on additional credit facility to a wilful defaulter or any entity with which a wilful defaulter is associated to be effective for a period of one year after the name of wilful defaulter has been removed from the List of Wilful Defaulters (LWD) by the lender.

Further, no credit facility will be granted by any lender for floating of new ventures to a wilful defaulter or any entity with which a wilful defaulter is associated for a period of five years after the name of wilful defaulter has been removed from the LWD by the lender.

Wilful defaulters or any entity with which a wilful defaulter is associated will not be eligible for restructuring of credit facility. Such entities will be eligible for restructuring only after removal of the name of wilful defaulter from the LWD.

RBI said if the wilful defaulter is a natural person, all entities in which he is associated as promoter, or director, or as one in charge and responsible for the management of the affairs of the entity shall be deemed to be associated.

These penal provisions will cease to be applicable on the associated entities when they are no longer associated with the wilful defaulters.

Incorporation of covenant

The RBI said the lender has to incorporate a covenant in the loan agreement with a borrower that it will not induct a person whose name appears in the LWD on its board or as a person in charge and responsible for the management of the affairs of the entity.

When a default happens in making payment/ repayment by the principal debtor, the lender will be able to proceed against the guarantor even without exhausting the remedies against the principal debtor, per the direction.

Where a lender has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate.