Treatment of Wilful Defaulters and Large Defaulters Directions, 2023
Background of provisions regarding wilful defaulters:
RBI instituted a scheme for Collection and Dissemination Information on cases of wilful Default which came into force from 01.04.1999. The scheme was further revised by RBI in May 30, 2002 based on recommendations of working Group on Wilful Defaulters.
The recent master direction is issued based on review
-of all circulars (25 in Number) issued since 1999 till 2015
-Rulings from the Hon’ble Supreme Court and High Courts and
-Suggestions/representations received from banks and other stakeholders.
Scope of applicability: Master Direction on Treatment of Wilful Defaulters and Large Defaulters, released on 30th July 2024 shall be applicable to All Commercial Banks excluding Payments Bank, Cooperative banks, all Financial Institutions, including Non-Banking Financial Companies including Housing Finance Companies, Asset Reconstruction Companies, Credit Information Companies (last mentioned 3 entities are new addition to the scope of applicability)
These directions shall come into force within 90 days after their date of issuance ( ie) 01 November 2024.
Definition:
Before getting into details of amendments covered in New Directions, we shall understand the definitions of few basic concepts.
(1) wilful default:
wilful default shall be deemed to have occurred when the borrower defaults in meeting payment obligations to the lender and any one or more of the following features are noticed:
(a) borrower inspite of having the capacity to honour the said obligations, defaulted in meeting the payment/repayment obligations.
(b) has diverted the funds availed
(c) has siphoned off the funds availed
(d) borrower has disposed of immovable or movable assets provided as security for the credit facility without the approval of the lender
(2) wilful defaulter means
-any borrower or a guarantor who has committed wilful default and the outstanding amount is ₹25 lakh and above
a)where the WD is a company, its promoters and the directors (including WTD)
b) If its an entity other than company, the-person in charge of managing the affairs of the company.
Key highlights of the New Directions ( changes/new provisions)
1) Identifying wilful defaulter within specified timeframe: (New)
(a) Lender must examine wilful default aspect in all NPA accounts with an outstanding of over Rs 25 lakh. If wllful default is observed, declare the borrower as wilful defaulter within 6 months of the account becoming NPA, whereas until the existing scheme (circulars), there was no such maximum time limit.
(b) where WD was not observed during the initial examination, aspects regarding ‘wilful default’ shall be subsequently re-examined in terms of the board approved policy of the lender at a periodicity as may be specified by the board.
2) Definition of wilfil defaulter is amended to include (New)
(a) borrower or the promoter has failed in their commitment to the lender to infuse equity despite having the ability to infuse the equity, when the lender has extended loan based on this commitment and other conditions.
(b) Guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues.
3) The evidence of wilful default by the borrower shall be examined by an Identification Committee. (New)
(a) If Identification Committee (IC) is satisfied that an event of wilful default has occurred® it shall issue a show-cause notice to borrower / person incharge of management of affairs of the company and call for submissions (representations to prove the contrary) within 21 days of issuance of show cause notice.
(b) After considering the submissions and if found fit, IC shall make proposal to the Review Committee for classification as a wilful defaulter by explaining the reasons in writing.
(c) Review Committee shall provide an opportunity for a personal hearing also to the borrower and if it is not attended , RC after assessing the facts and materials including representations, take a decision and shall pass order & communicate the same to wilful defaulter.
4) Amendment to provision on Publishing of photographs of wilful defaulters:
Lenders shall formulate a non-discriminatory, board-approved policy which shall clearly set out the criteria based on which photographs of persons declared as wilful defaulter shall be published.
(Note: Existing circular on Publishing of photographs of Wilful Defaulters’ is being repealed with issuance of this Master Direction)
5) Amendments (new additions) made to Penal measures against wilful defaulters:
(a) No additional credit facility shall be given for upto period of one (1) year post the removal of name from List of Wilful Defaulters (LWD) by the lender.
(b) No credit facility for new ventures of WD or entity with which WD is associated, for a period of five (5) years after the name has been removed from LWD by the lender.
6) Large Defaulter: (New provision)
The new Direction also introduces the concept of large defaulter, who is a person or entity which has defaulted on a payment of Rs 1 crore or more.
7) Reporting and Dissemination of Credit Information to CIC (Existing 2014 Circular in this regard has been incorporated without any change in this master direction)
(a) All lenders must submit Information wrt Wilful Defaulters and Large defaulters to Credit Information Companies on a monthly basis.
(b) Regarding WD: CIC shall display the suit-filed and non-suit filed accounts of LWD on its website.
(c) Regarding Large defaulters: The CICs will display the list of suit-filed accounts in their website and
shall provide access to non-suit filed accounts.
(d) Cases of wilful defaults at overseas branches of banks incorporated in India shall be reported, if such disclosure is not prohibited under the laws of the host country.
8) Treatment of defaulted loans sold to the other lenders and ARCs (New provision)
(a) Sale to other lenders/ ARCs shall not be treated as recovery, as the loan amount is not yet recovered.
(b) The transferee lender/ ARCs shall continue to report the account as a wilful defaulter until the balance to be recovered falls below the threshold of ₹25 lakh
(c) lender or ARC to which the account has been transferred, shall inform CICs the removal of the name of the wilful defaulter from the LWD, within 30 days from the date when the outstanding amount falls below the threshold of ₹25 lakhs
9) Compromise settlements (existing 2008 mail box clarification issued by RBI, incorporated in this master direction)
(a) Accounts included in LWD, where lender has entered into a compromise settlement with borrower, shall be removed from LWD only when the borrower has fully paid the compromise amount.
(b) Till such time it is paid, name of the borrower shall not be removed from the LWD even if the outstanding amount becomes less than the threshold of ₹25 lakh
(c) The compromise settlement with the wilful defaulter shall be in terms of the board approved policy of the lender.
10) Treatment of accounts where resolution is done under Insolvency and Bankruptcy Code (IBC)/ guidelines issued by the Reserve Bank
(a) In case an LWD account has subsequently undergone a resolution resulting in change in management and control of the entity, then, the name of such a wilful defaulter shall be removed from the LWD after implementation of the resolution plan
(b) The penal measures shall not be applicable to entities/ business enterprises after implementation of the resolution plan but
(c) shall continue to apply to erstwhile -director, guarantor, promoter and persons who were responsible for managing the affairs of the entity.