Framework for Wilful Defaulters, Objective, Applicability

Context: The Reserve Bank of India (RBI) released a Master Direction on the treatment of wilful defaulters.

Framework for Wilful Defaulters

• Objective:
  • Establish a transparent and non-discriminatory procedure for classifying borrowers as wilful defaulters
  • Disseminate credit information about wilful defaulters to caution lenders against extending further finance to them
• Applicability:
  • Effective 90 days from publication
  • This applies to all commercial banks, cooperative banks, financial institutions, non-banking financial companies (NBFCs), asset reconstruction companies (ARCs), and credit information companies (CICs)
  • Restrictions on further financial accommodations extend to all RBI-regulated entities

• Reporting Requirements:
  • Lenders must report wilful defaulters to Credit Information Companies (CICs)
  • Responsibility for accurate reporting lies with the lender
  • Lenders must cross-check information with relevant databases (e.g., Registrar of Companies)
  • Specific guidelines for reporting settled cases, defaulted loans sold to other lenders or ARCs, and accounts resolved under IBC or other frameworks
• Preventive Measures:
  • Lenders must implement robust credit appraisal systems
  • Monitor end-use of funds
  • Scrutinise quarterly progress reports
  • Conduct regular inspection of borrowers’ assets
  • Perform periodic management audits
• Role of Auditors:
  • Critical in detecting and preventing wilful defaults
  • Lenders must report negligent auditors to the National Financial Reporting Authority (NFRA) or the Institute of Chartered Accountants of India (ICAI)

What Is Wilful Defaulter?

As per RBI guidelines, a wilful default occurs when a borrower (a person or company) misuses borrowed funds, diverting them from their intended purpose, syphoning off money, or disposing of assets securing a term loan without the lender’s knowledge.

Consequences of Being Declared a Wilful Defaulter

• Credit Access Restrictions:
  • Ineligibility to borrow from any financial institution.
  • Complete shutdown of access to credit channels.
• Impediment to New Ventures:
  • Inability to secure institutional finance for starting new businesses for a period of five years.
  • Hindrance to entrepreneurial initiatives.
• Legal Implications:
  • Lenders have the option to initiate criminal action against the defaulter.
  • Potential legal consequences for the borrower.
• Reporting to Credit Information Companies:
  • Banks are obligated to provide a list of wilful defaulters with outstanding loan balances exceeding ₹25 lakh (where suits have been filed) to credit information companies such as CIBIL, Experian, Equifax, and High Mark at the end of each quarter.
  • Reporting includes the names of current directors and directors associated with the company when the borrower was declared a defaulter.
  • This reporting can deter potential lenders from extending credit to the individual or entity.

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