How RBI Plans to Crack Down on Wilful Defaulters

The Reserve Bank of India (RBI) has taken a decisive step to curb the menace of wilful defaulters by introducing comprehensive guidelines for their classification and management. Effective from the end of October, these regulations mandate lenders to identify and tag borrowers who deliberately default on loans within six months of their accounts turning sour.

Let's understand in details who the willful defaulters are, what are the new guideline and how will the new guidelines impact the defaulters?

Who Does This Affect?

The RBI's directive casts a wide net, encompassing not just banks but also non-banking financial companies (NBFCs) and other financial institutions such as Exim Bank and Nabard. This sweeping approach is a result of extensive consultations with banks and stakeholders, coupled with insights from various high court and Supreme Court rulings on wilful defaulters.

Why is This Important?

Financial experts hail the new guidelines as a pivotal move to fortify India's financial ecosystem. By establishing clear-cut measures against defaulters and robust reporting mechanisms, the RBI aims to deter intentional defaults and foster a culture of credit discipline.

Who is a Wilful Defaulter?

According to the RBI, a wilful defaulter is a borrower who has the capacity to repay a loan but deliberately defaults on it. This category also includes those who divert or misappropriate funds sanctioned under a credit facility. Importantly, the determination of wilful default hinges on the borrower's overall track record rather than isolated incidents.

How Will Wilful Defaulters Be Identified?

Lenders are tasked with scrutinizing all bad loans worth Rs 25 lakh and above for potential signs of wilful default. This involves a thorough examination of the borrower or guarantor's conduct. If preliminary assessments point to wilful default, the classification process must be completed within six months.

The RBI mandates the formation of an identification committee to review the evidence. If the committee finds sufficient grounds, a show-cause notice is issued to the borrower or responsible individuals, demanding a response within 21 days. Subsequently, a review committee assesses the matter and offers a personal hearing to concerned parties before making a final decision.

What are the Penalties for Wilful Defaulters?

Lenders must adopt a board-approved policy to publicly disclose photographs of individuals declared as wilful defaulters. The stringent penalties include:

• A complete ban on additional credit facilities to the wilful defaulter and associated entities.
• A one-year ban on new credit facilities even after the defaulter's name is removed from the List of Wilful Defaulters (LWD).
• A five-year ban on credit facilities for new ventures linked to the wilful defaulter post removal from the LWD.
• Ineligibility for credit facility restructuring for wilful defaulters or associated entities until the name is removed from the LWD.

How Will This Impact Financial Institutions?

The lenders must incorporate a clause in loan agreements preventing individuals listed as wilful defaulters from holding key positions in borrowing entities. Moreover, the guidelines empower lenders to take immediate action against guarantors upon default by the principal debtor, without exhausting other remedies first.

What Does This Mean for Borrowers?

The new guidelines underscore a stricter approach to credit discipline. The RBI emphasizes that the determination of wilful default should consider the borrower's overall track record rather than isolated incidents. This implies a meticulous evaluation of a borrower's history and conduct regarding loan repayments.

How Will This Improve Credit Discipline?

By enforcing these guidelines, the RBI aims to cultivate a culture of responsibility and accountability among both borrowers and financial institutions. The measures are expected to deter wilful defaults, thereby strengthening credit discipline across the financial sector. Ultimately, the RBI's initiative seeks to create a transparent and fair system for dealing with wilful defaulters, safeguarding the integrity of the banking system.

The RBI's new guidelines on wilful defaulters mark a significant overhaul of the regulatory landscape. By imposing stringent measures and ensuring a fair identification process, the central bank aims to bolster the stability and reliability of India's financial system. These guidelines are poised to have a far-reaching impact, promoting better credit discipline and reducing the incidence of deliberate defaults.

Join Our Thriving Entrepreneurial Community

Follow TICE News on Social Media and create a strong community of Talent, Ideas, Capital, and Entrepreneurship. YouTube  | Linkedin | X (Twitter) | Facebook | News Letters