RBI Enforces 6 Month Deadline for Banks for Declaring Wilful Defaulters
The Reserve Bank of India (RBI) has denied a request from banks seeking more time to classify borrowers as “wilful defaulters.” This label is applied to individuals or companies that misuse borrowed funds or refuse to repay loans despite having the means to do so.
RBI’s Six-Month Deadline
Around two weeks ago, the RBI communicated to banks that the process of declaring a borrower as a wilful defaulter must be completed within six months. According to a source familiar with the RBI’s directive, delaying the classification process could reduce the value of the borrower’s assets, making recovery more difficult.
Banks follow a strict process outlined by the RBI before tagging a borrower as a wilful defaulter. This label carries significant consequences, including public naming and shaming, loss of access to institutional credit, and potential legal battles.
The Process of Classification
When a borrower’s account becomes a Non-Performing Asset (NPA)—where loan repayments are overdue by more than 90 days—the bank initiates an internal review. Officials identify the borrower as a potential wilful defaulter and provide them with an opportunity to explain their case during a personal hearing.
However, banks have observed that some borrowers use delaying tactics to avoid being classified as wilful defaulters. This has led to extended timelines for the process, sometimes taking up to a year. Despite this, the RBI has maintained its stance that the process must be completed within six months to ensure efficiency and accountability.
Role of Bank Committees
The classification process begins with an “identification committee,” an internal bank panel that evaluates whether the default was deliberate. If the committee suspects wilful default, the case is referred to a “review committee.” This committee includes the bank’s CEO and independent directors, who assess the borrower’s explanation and pass a final decision.
During the hearing, borrowers are not allowed legal representation, and if they refuse to participate, the committee proceeds based on available evidence. Borrowers who sell assets or fail to contribute promised equity despite having the capacity may also be classified as wilful defaulters. The definition extends to guarantors who refuse to honor guarantees despite having sufficient funds.
Public Disclosure and Credit Bureau Alerts
The RBI’s June 2024 Master Circular allows banks to adopt policies for publishing the photographs of wilful defaulters. Once a borrower is classified, banks notify credit information bureaus, making the information accessible to other lenders.
Implications of the Tag
The wilful defaulter label has far-reaching consequences. It not only impacts the borrower’s reputation but also triggers legal proceedings. Additionally, the issue is politically sensitive, as some defaulters may attempt to flee the country to evade consequences.
By enforcing the six-month deadline, the RBI aims to streamline the process and prevent delays that could undermine asset recovery efforts.
