Introduction
The Reserve Bank of India (‘RBI’) has issued the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024 (‘Directions’) on 30th July, 2024 which serves as a comprehensive regulatory framework addressing the issue of wilful and large defaulters within the Indian Financial System. The need for this directive arises from the growing concerns over borrowers who deliberately default on their financial obligations leading to huge risks for the banking sector.

The primary objective of these Directions is to provide for a non - discriminatory and transparent procedure having regard to the principles of natural justice, for classifying a borrower as a wilful defaulter by the lenders. The Directions are also designed to establish a system for sharing credit information about wilful defaulters, thereby warning lenders to prevent them from receiving further institutional financing.

Scope and Applicability
The Directions apply to a broad range of financial institutions namely:

• All Commercial Banks including Small Finance Banks, Local Area Banks and Regional Rural Bank and excluding Payments Banks;
• All Primary (Urban) Co - operative Banks / State Co - operative Banks / Central Co - operative Banks,
• All Indian Financial Institutions including Exim Bank, NABARD, NHB, SIDBI and NaBFID,
• All Non - Banking Financial Companies including Housing Finance Companies,
• Asset Reconstruction Companies and All Credit Information Companies.

Key Definitions

1. “Wilful Default” - (i) by a borrower shall be deemed to have occurred when the borrower defaults in meeting payment/repayment obligations to the lender and any one or more of the following features are noticed:
   1. the borrower has the capacity to honour the said obligations;
   2. the borrower has diverted the funds availed under the credit facility from lender;
   3. the borrower has siphoned off the funds availed under the credit facility from lender;
   4. the borrower has disposed of immovable or movable assets provided for the purpose of securing the credit facility without the approval of the lender;
   5. the borrower or the promoter has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment and other covenants and conditions.
   (ii) by a guarantor shall be deemed to have occurred if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues or has disposed of immovable or movable assets provided for the purpose of securing the credit facility, without the approval of the lender or has failed in commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment.
2. “large defaulter” means a defaulter with an outstanding amount of Rs. 1 crore and above and -
   1. where suit has been filed; or
   2. whose account has been classified as doubtful or loss (in accordance with the instructions issued by the RBI from time to time).
3. “credit facility” means any fund based or non fund based facility, including off balance sheet items like derivatives, guarantees and letters of credit, which a lender has extended to the borrower.
4. “siphoning of funds shall be construed to have occurred if any funds availed using credit facility from lenders are utilised for purposes unrelated to the operations of the borrower.
5. “wilful defaulter” means (i) a borrower or a guarantor who has committed wilful default and the outstanding amount is Rs. 25 lakhs and above, or as may be notified by the RBI from time to time and
   (ii) where the borrower or a guarantor committing the wilful default is a company, its promoters and the director (s). In case of entity (other than companies), persons who are in charge and responsible for the management of the affairs of the entity.

Process of Identification and Classification of Wilful Defaulters
The Directions outline a stringent and transparent procedure for identifying and classifying a person as a wilful defaulter. The Identification of the wilful default is to be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated incidents. The criteria for default to be considered as wilful must be intentional, deliberate, calculated and should meet the conditions set out in the definition of ‘wilful default’.

Identification Committee
The evidence of wilful default shall be examined by an Identification Committee. If the Identification Committee is satisfied that an event of wilful default has occurred, it shall issue a show cause notice to the borrower/guarantor/ promoter/director/persons who are in charge and responsible for the management of the affairs of the entity, and call for written representations from them within 21 days of issuance of show cause notice.

This is the first opportunity that the borrower/guarantor/ promoter/director/persons who are in charge and responsible for the management of the affairs of the entity gets to give reasons as to why they should not be declared as wilful defaulters. After considering the submissions and on being satisfied that no grounds have been established to contest the classification as a wilful defaulter, the Identification Committee shall make a proposal to the Review Committee for classification as a wilful defaulter by explaining the reasons in writing. Thereafter the borrower/guarantor/promoter/director/persons who are in charge and responsible for the management of the affairs of the entity shall thereafter be suitably advised about the proposal to classify them as wilful defaulter along with the reasons.

Review Committee
An opportunity shall be provided to the borrower/guarantor/ promoter/director/persons who are in charge for making a written representation to the Review Committee within 15 days of the proposal from the Identification Committee. The Review Committee shall be providing an opportunity for a personal hearing to the borrower/guarantor/ promoter/director/persons who are in charge and responsible, however, if the opportunity is not availed or if the personal hearing is not attended by the said concerned persons, the Review Committee shall take a decision after assessing the facts and material on record and consider the proposal of the Identification Committee if any.

Review of accounts for identification of wilful default
The lender assess the ‘wilful default’ aspect in all Non - Performing Assets (NPA) accounts with outstanding amount of Rs. 25 lakhs and above or as may be notified by RBI from time to time.

Specific Measures against wilful defaulters
Certain specific measures can be initiated against wilful defaulters, which are as follows:

Initiation of Criminal Proceedings by the lenders against wilful defaulters
Based on the facts and circumstances of each case, lenders can examine whether criminal proceedings against wilful defaulters under the provisions of the applicable law are warranted. In cases where criminal proceedings have been initiated, removing the name of a wilful defaulter from the List of Wilful Defaulters (LWD) must be made without prejudice to the continuation of criminal proceedings against the wilful defaulter.

Publishing of photographs of wilful defaulters
The lenders must 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 must be published.

Penal and other measures against wilful defaulters
The lenders must implement the following penal measures:-

1. No additional credit facility must be granted by any lender to a wilful defaulter or any entity associated with a wilful defaulter.
2. The bar on additional credit to a wilful defaulter or associated entity must remain effective for 1 year after removal from the defaulter's list.
3. No lender shall grant credit for new ventures to a wilful defaulter or their associated entities for 5 years after removal from the defaulter's list.
4. Wilful defaulters or any entity with which a wilful defaulter is associated must not be eligible for restructuring of credit facility.

Further, the lender must incorporate a covenant in the agreement while extending credit facility to a borrower that it must not induct a person whose name appears in the list of wilful defaulters on its board or as a person in charge and responsible for managing the affairs of the entity. Also, the lender must initiate legal action against the borrowers/guarantors for foreclosure/recovery of dues expeditiously.

Liability of a Guarantor
According to Section 128 of the Indian Contract Act, 1872, the liability of the guarantor is coextensive with that of the principal debtor unless it otherwise provided by the contract.

When the principal debtor defaults on payment, the lender can proceed against the guarantor even without exhausting the remedies against the principal debtor. Furthermore, where a lender has made a claim on the guarantor due to the default of the principal debtor, the liability of the guarantor is immediate.

If the guarantor refuses to comply with the demand made by the lender, such a guarantor shall also be considered for classification as a wilful defaulter.

Furthermore, while dealing with the wilful default of a single borrowing company in a Group, the lenders must consider the track record of the individual company, particular its repayment performance. Group companies must also be considered for classification as wilful defaulter in cases where guarantees furnished by the companies within the Group on behalf of the wilfully defaulting units are not honoured when invoked by the lenders.

Reporting and Dissemination of Credit Information on large defaulters
The reporting and dissemination of credit information on large defaulters must apply to all RBI-regulated entities, regardless of their status as lenders. All RBI-regulated entities, including lenders, shall submit monthly information to credit information companies (CICs). This includes the list of large defaulters with suit-filed accounts and the list of large defaulters with non-suit filed accounts that are classified as doubtful or loss.

Further, to calculate the Rs. 1 crore threshold, the unapplied interest, if any, must also be included. For suit-filed accounts, the threshold must relate to the amount covered by the suits.

The CICs must also provide access to the list of non-suit filed accounts of large defaulters to all credit institutions and display the list of suit-filed accounts of large defaulters on their website.

Reporting of Credit Information on Wilful Defaulters by lenders
All lenders must submit, at monthly intervals to all CICs in respect of the wilful defaulters, the list of wilful defaulters in respect of suit filed accounts and the list of wilful defaulters in respect of non-suit filed accounts.

The lender must notify all CICs regarding the removal of the name of the wilful defaulter from the list of wilful defaulters, promptly and not later than 30 days, from the date when the outstanding amount falls below the threshold of Rs. 25 lakh or as notified by the RBI.

Every CIC must display the suit filed and non-suit filed accounts of the list of wilful defaulters on its website. The cases of wilful default at overseas branches of banks incorporated in India must be reported, if such disclosure is not prohibited under the laws of the host country.

In any event, a Non-Banking Financial Company in the middle layer or above, or a Non-Scheduled Urban Cooperative Bank falling under Tier 3 or 4, is reclassified to a lower tier, it shall no longer be eligible to classify borrowers as wilful defaulters. However, such Non-Banking Financial Companies/Urban Cooperative Banks must continue to furnish updates pertaining to historical data submitted by them to the CICs.

Direction on treatment of compromise settlements
Any account, including in the list of wilful defaulters, where the lender has entered into a compromise settlement with the borrower, shall be removed from the list of wilful defaulters only when the borrower has fully paid the compromise amount. Until full payment is made, the borrower's name will remain in the list of wilful defaulters, even if the outstanding amount falls below Rs. 25 lakh or the threshold set by the RBI.

Furthermore, the compromise settlement with the wilful defaulter must be in accordance with the lender’s board approved policy. Such policy shall include guidelines on staff accountability examination, reporting of the compromise/ settlement and higher upfront payments. The compromise settlement will not affect the continuation of criminal proceedings against the wilful defaulter.

Treatment of defaulted loans sold to other lenders/Asset Reconstruction Companies (ARCs)
Before transferring a defaulted loan with an outstanding amount of Rs. 25 lakh and above, regardless of its classification as a Non Performing Asset, the lender must internally conduct a comprehensive investigation to assess wilful default.

If wilful default is observed, lenders must classify the borrower as a wilful defaulter and report it to the list of wilful defaulters and CICs before selling the asset to other lenders or asset reconstruction companies The reporting details must also be conveyed to the 'transferee' lenders or asset reconstruction companies who will then report to the CICs.

Further, the "transferee" or lenders or asset reconstruction companies must continue to report the account as a wilful defaulter until the remaining balance plus the amount written off by the "transferor" lender falls below Rs. 25 lakhs or as notified by the RBI.

Removal of wilful defaulter status post liquidation under Insolvency and Bankruptcy Code
In case an account is included in the list of wilful defaulters and has subsequently undergone liquidation or where the resolution results in a change in the management and control of the entity/ business enterprise, the name of such a borrower or guarantor who was classified as a wilful defaulter must be removed from the list of defaulters after implementation of the resolution plan under IBC or the aforesaid prudential framework.

Responsibility of the lender for Correct Reporting
The responsibility for reporting correct information and also ensuring the accuracy of facts and figures rests with the concerned lender. The lenders while furnishing information to CICs shall ensure the accuracy of the particulars of the directors, and wherever possible, by cross-checking with the database maintained by the Registrar of Companies.

Guidelines for reporting of guarantors and directors by lenders and RBI regulated entities
Entities regulated by the RBI or lenders must report to CICs, the details of guarantors who have failed to honour the commitments thereunder when invoked as large defaulters or wilful defaulters. In case of business enterprises registered under the Companies Act, 2013, lenders must report the full names of directors to facilitate better identity of the persons concerned. Additionally, in order to ensure that the directors are correctly identified and in no case, persons whose names appear to be similar to the names of directors appearing in the list of wilful defaulters are wrongfully denied credit facilities on such grounds, lenders shall include the Director Identification (DIN) in the data submitted to CICs.

Preventive Measures adopted by RBI
Some preventive measures are adopted by the RBI, which are as follows -

1. Credit Appraisal
   While carrying out the credit appraisal, all entities regulated by the RBI shall verify whether the name of any of the directors of a company, guarantors or persons in charge of the management of affairs of the entity appears in the list of large defaulters or list of wilful defaulters. If any doubt arises due to identical names, the lender must use independent sources to confirm the identity of the directors rather than seeking a declaration from the borrowing company.
    
2. Monitoring end use funds
   The regulated entities of RBI shall closely monitor the end use of funds and obtain certificates from borrowers certifying that the funds have been utilized for the purpose for which they were obtained. In case of the wrong certification by the borrowers, the regulated entities of RBI shall consider initiating appropriate legal proceedings, including criminal proceedings wherever necessary, against the borrowers.
   
   Furthermore, some measures for monitoring and ensuring the end use of funds by lenders cover meaningful scrutiny of quarterly progress reports/operating/statements/balance sheets of the borrowers, periodic visits to the assisted units, regular inspection of borrowers’ assets charged to the lender as security, periodic scrutiny of borrowers’ books of accounts, periodic visits to the assisted units etc.

Role of Statutory Auditors and providing an opportunity of being heard
If the lender observes any falsification of accounts on the part of the borrowers and the auditors are found to be negligent or deficient in conducting the audit, the lender shall consider lodging a formal complaint against the statutory auditors of the borrowers with the National Financial Reporting Authority (NFRA) / Institute of Chartered Accountants of India (ICAI) to enable them to examine and fix the auditor’s accountability.

Before reporting to the RBI and Indian Banks’ Association (IBA), lenders must satisfy themselves of the involvement of concerned auditors and also provide them with an opportunity of being heard. The lenders must follow normal procedures and processes, which shall be suitably recorded. Based on such information, the Indian Banks’ Association (IBA) shall in turn, prepare a caution list of such auditors for circulation among the lenders, who must consider this aspect before assigning any work to them.

To prevent the diversion or the siphoning of funds by the borrowers, the lenders are free to engage their auditors for such specific certification without relying on certification given by the borrowers’ auditor.

Role of Third Parties
As prescribed in the Master Directions on Fraud Management dated 15.07.2024, lenders shall hold third parties accountable for wilful defaults if they played a significant role in credit sanction or disbursement and were negligent or facilitated the default. Further, the lenders must forward details of such third parties to the Indian Banks’ Association (IBA) for records. Before reporting to Indian Banks’ Association (IBA), lenders have to satisfy themselves of the involvement of concerned third parties and also provide them with an opportunity of being heard.

Conclusion
In conclusion, the revised RBI Master Directions on Wilful Defaulters has significantly expanded the definition of "wilful default" to encompass situations where borrowers or promoters fail to infuse equity despite having the financial capacity to do so. Additionally, guarantors can now be classified as wilful defaulters if they dispose of secured assets without lender approval or fail to fulfill equity infusion commitments, which were the basis for loans or concessions granted by the lender.

These enhanced guidelines offer a comprehensive and transparent framework to address wilful defaults, reinforcing the integrity of the financial system. The directions reflect a robust response to growing concerns raised by the Central Vigilance Commission and parliamentary committees, emphasizing the need for stringent oversight and accountability. By mandating detailed procedures for classifying wilful defaulters, including regular reporting and potential legal actions, the RBI aims to curb intentional and calculated defaults that threaten financial stability.

Understanding the intricacies of wilful default and the associated legal obligations under various laws, such as the Companies Act, 2013 and SEBI regulations, is crucial for all stakeholders. Both lenders and borrowers must navigate these regulations with due diligence to ensure compliance and safeguard their interests within the financial ecosystem.

By - Soumya Kamat