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After a prolonged debate on who is a wilful defaulter, the Reserve of India finally clarified its stand, issuing draft guidelines on September 21 on the vexed topic, identification and treatment of such defaulters. The RBI move follows direction by the Supreme Court earlier this year that lenders have to mandatorily offer debtors a hearing before categorising them as fraud.

The central bank has solicited feedback on the proposal by the end of October this year. RBI would proceed to frame the final rules once the feedback is received.

The guidelines have envisaged the setting up of two committees that would offer a two-step process for the borrower to represent its case to the lender both in person and in writing.

“The instructions on wilful defaulters have been revised after a review of the extant instructions and consideration of various judgments/ orders from the Hon’ble Supreme Court and Hon’ble High Courts, as well as representations/ suggestions received from banks and other stakeholders,” RBI wrote in a notification about the proposed new rules.

According to the draft rules ‘wilful default’ would take place when the borrower defaults in repayment obligations to the lender. Moreover, at least one of the following features is present in the act of default – the borrower has the capacity to honour the obligations, the debtor has diverted the funds obtained as credit facility from the creditor,
the borrower has siphoned off money procured under the credit facility, the borrower has disposed of immovable or movable assets that he had earlier offered as collateral to obtain the loan and the took the step keeping the lender in the dark or, the borrower has failed to infuse equity, something it had promised to do before the lender despite having the ability to inject equity.

Wilful default by a guarantor can also take place if the guarantor of a credit fails to honour the guarantee as and when it is invoked by the creditor even if he/she/it has the wherewithal to do so.

RBI wants to describe a debtor (or, a guarantor) who has committed wilful default and the outstanding credit is at least Rs 25 lakh. This amount might vary depending upon RBI notification from time to time.

A point to note is that if the wilful default is performed by a company, its promoters and directors who were associated with the company at the time of default will also be labelled as wilful defaulters. Besides, people who are running the company will also earn that label.

The new rules are proposed to be universally applicable. All regulated entities, including banks, non-bank lenders including housing finance companies, co-operative banks, regional rural banks, local area banks, and all India financial institutions such as NABARD, SIDBI, EXIM Bank, NHB and NaBFID will all come under the purview of this master guidelines.

The RBI has stipulated that there will be a committee to identify acts of wilful default. This body will examine all aspects before proceeding to slap that label on the borrower. The committee has to be constituted by the lending institution and should include a wholetime director other than the CEO as chairperson and two senior officials as members.

This committee – known as the Identification Committee – will issue a show-cause notice to borrower/ guarantor/ promoter/ director/person in-charge and call for the submissions. This committee would consider the submissions before framing the proposal on that particular case. It would also appraise the borrower about the proposal to label it/them as wilful defaulters. This committee should also offer the borrower an opportunity to submit its representation in writing within a “reasonable time” (say 15 days) to another committee which will be known as the Review Committee.

The Review Committee also has to be set up by the lending institution. It would consider both the proposal of Identification Committee and the written representation by borrower. The Review Committee should allow the borrower a personal hearing. Following the hearing it would pass a “reasoned order”. It would be the responsibility of the Review Committee to convey what decision it takes to the wilful defaulter.

The RBI has also clarified that a non-whole-time director, including an independent director/ nominee director cannot be considered as wilful defaulter unless the default took place by their consent, or if they were aware of the wilful default but had failed to record their objections.

These changes were proposed by RBI after the apex court said that borrowers must get an opportunity to explain themselves before earning the dubious distinction of a wilful defaulter. The Supreme Court said this while issuing a verdict on the Reserve Bank of India’s (RBI’s) 2016 circular allowing banks to declare wilful defaulters as “fraud” earlier this year.

The rules also stipulate that creditor institutions must review the ‘wilful default’ aspect in accounts with an outstanding credit of Rs 25 lakh or more. Moreover, the process of classification of wilful default should be completed within 6 months of the account being classified as nonperforming asset.

No credit facility can be further granted to a wilful defaulter or any entity with which a wilful defaulter is associated. Defaulters who would be dubbed as wilful would also not be eligible for restructuring of credit facility.
While extending credit, a lending institution would also instruct the borrower that the company/borrower shall not induct a wilful defaulter on its board.

Lenders also have the power to take legal action against the borrowers/guarantors for foreclosure/ recovery of dues. When a default happens in repayment by the principal debtor, lenders would also have the power to proceed against the guarantor even when they have not exhausted legal steps against the principal borrower.

RBI said that these instructions on any guarantor could apply with effect from September 9, 2014. Guarantees taken earlier that this date would not come under its purview.