Banks to tag wilful default in six months under new rules

Mumbai: The Reserve Bank of India (RBI) on Thursday issued draft guidelines on classification of wilful defaulters, expanding the definition of the term and mandating lenders to complete the process of identifying and tagging borrowers as wilful defaulters within six months of loans turning bad.

Apart from various judgements by high courts and the Supreme Court, the regulator said it has received suggestions from banks and other stakeholders on the matter. The new draft provisions would apply to banks, non-banking financial companies (NBFCs) and all-India financial institutions like the Export-Import Bank of India (Exim Bank) and the National Bank for Agriculture and Rural Development (Nabard).

A borrower can be labelled a wilful defaulter for defaulting on repayments despite having the capacity to make them. This would also include those who have diverted or siphoned off borrowed funds. That apart, those who fail to infuse equity despite agreeing to do so, and having the wherewithal to do so, would also come under this definition. It would include outstanding loans of ₹25 lakh or more.

The regulator said lenders need to complete classifying and declaring a borrower as a wilful defaulter within six months of the loan being classified as non-performing. Banks classify loans as bad or non-performing when repayments are delayed for over 90 days.

Bankers are not too excited about the RBI fixing a deadline to classify a borrower as a wilful defaulter.

A senior private sector banker said it takes over six months just to do a forensic audit and conduct personal hearings. “There are also several delays because of adjournments in these hearings. It takes time to even convene consortium meetings and come to an agreement,” the banker said on condition of anonymity.

Wilful defaulters will not be able to avail fresh loans for one year after the lender removes them from the list of wilful defaulters. This restriction would apply to all entities regulated by the RBI.

Under the draft guidelines, the RBI said lenders need to examine the evidence of wilful default by an identification committee and if this panel is satisfied that wilful default has occurred, it will issue a show-cause notice to those involved.

“After considering the submissions and where satisfied, the identification committee shall make a proposal to the review committee for classification as a wilful defaulter by explaining the reasons in writing,” it said.

The borrower, guarantor, promoter and director in charge and responsible for the management of the entity will then be informed of the plan to classify it as a wilful defaulter along with the reasons.

Lenders will have to provide an opportunity to those involved for making a written representation against a proposal to classify as a wilful defaulter within about 15 days to the review committee. The proposal of the identification committee along with the written representation will then be considered by the review committee, which will also provide a personal hearing.

“Lenders shall formulate guidelines, based on their board-approved policy, for nominating authorized officers, who would issue the show-cause notice and serve written order on behalf of the identification committee and review committee, respectively,” it said.

The draft circular also addresses the treatment of wilful default loans sold to asset reconstruction companies (ARCs) and their status under the Insolvency and Bankruptcy Code.

The draft circular mandates lenders to investigate borrowers from a wilful default angle before transferring loans to other lenders and ARCs. In case wilful default is established, the RBI said the lender must report it in the list of wilful defaulters to credit information companies before selling the asset.

The regulator has sought comments and feedback from regulated entities and other stakeholders by 31 October.