RBI directions on willful defaulter

RBI directions on willful defaulter

Subject: Economy

Section: Monetary Policy

In News: Lenders must classify wilful defaulters within 6 months of an a/c turning NPA.

Key Points:

• RBI has issued a draft paper proposing revisions in the guidelines for handling wilful defaulters:
  •  It has expanded the scope for regulated entities that can classify borrowers as wilful defaulters.
  • Broadened the definition of wilful default,
  • and refined the identification process and mandates a review and finalisation on wilful default aspects within six months of an account being classified as a non-performing asset.
• The revised framework comes after the Supreme Court ruling in March 2023:
  • in a case against RBI’s 2016 circular, ruled that a hearing must be allowed to borrowers before the classification of an account as fraud and that there must be no unilateral declaration of fraud by banks without a hearing
• Identification of willful defaulter:
  • The RBI has proposed that lenders will need to examine the ‘wilful default’ aspect in all accounts with outstanding amount of ₹25 lakh and above and complete the process of classification as a wilful defaulter within six months of the account being classified as NPA.
  • There is no such timeline in the existing regulations  per the draft norms,
  • Lenders may identify and classify a person as a ‘wilful defaulter’ after examining of the evidence by an Identification Committee, which will then issue a show-cause notice to concerned person for submissions.
  • The Identification Committee will then make a proposal to the review committee and an opportunity will need to be provided to the defaulter to present against the proposal within a reasonable time.
• Further, a non-whole-time director, including an independent director/ nominee director, will not be considered as wilful defaulter unless it is conclusively established that the wilful default was undertaken with their consent or connivance or they were aware of the default.
• Restrictions on willful defaulter:
  • No additional credit facility shall be granted by any lender to a wilful defaulter or any entity with which a wilful defaulter is associated Credit facility
  • The bar on additional credit facility will be effective for up to one year after the name of the wilful defaulter has been removed from the List of Wilful Defaulters (LWD) by the lender,
  • No credit for floating of new ventures can be given for 5 years. Wilful defaulters will also not be eligible for restructuring of credit facility. Further, lenders can initiate legal and criminal proceedings and demand penal charges where applicable