Mumbai: The Reserve Bank of India (RBI) on Tuesday issued final guidelines on the classification of wilful defaulters, directing lenders to complete identifying and tagging such a borrower within six months of it turning bad.

The guidelines will be applicable to banks, non-banking financial companies (NBFCs), and financial institutions such as the Export-Import Bank of India (Exim Bank) and the National Bank for Agriculture and Rural Development (Nabard).

The final guidelines come 10 months after RBI in September said it had received suggestions from banks and other stakeholders, apart from considering various judgements by high courts and the Supreme Court on wilful defaulters.

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Experts said the new guidelines are a pivotal move towards fortifying the integrity of India’s financial system.

“These guidelines not only standardise the process for identifying wilful defaulters but also ensure a transparent and non-discriminatory approach, upholding the principles of natural justice,” said Kunal Shah, group chief financial officer and managing director of retail solutions at TruBoard Partners, a tech-based credit monitoring and loan collection company.

By clearly defining measures against defaulters and establishing robust reporting mechanisms, RBI aims to deter deliberate defaults and enhance credit discipline, he added.

According to the data on suit-filed accounts from credit bureau TransUnion Cibil, the total outstanding wilful default as of 31 March stood at ₹3.6 trillion.

Who’s a wilful defaulter?

A borrower will be classified as a wilful defaulter if they default on loans despite having the capacity to repay. The tag would also apply to those who have diverted funds taken from lenders or “siphoned off the funds availed under the credit facility from lender”.

“The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/ incidents,” RBI said on Tuesday. “The default to be categorised as wilful must be intentional, deliberate, calculated and meeting the conditions…”

The regulator added that lenders will have to check all bad loans of ₹25 lakh and above for signs of wilful default. This would encompass the borrower or the guarantor who has wilfully defaulted on loans.

If banks in their internal preliminary screenings find that a borrower has wilfully defaulted on a loan, they would have to complete the entire process of categorising the borrower as a wilful defaulter within six months.

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According to RBI, the evidence of wilful default will have to be examined by an identification committee.

If the committee is satisfied that a borrower has wilfully defaulted, it will issue a show-cause notice to the borrower, guarantor, promoter, director or people in charge and responsible for the management of the entity. The committee will also call for submissions from them within 21 days of the notice.

RBI said that after considering the submissions and if satisfied, the committee will make a proposal to the review committee for classification as a wilful defaulter.

“The review committee shall provide an opportunity for a personal hearing also to the borrower/ guarantor/ promoter/ director/ persons who are in charge and responsible for the management of the affairs of the entity,” RBI said, adding that given it is an in-house proceeding, borrowers shall not have the right to be represented by a lawyer.

The regulator also said that before transferring a defaulted loan of ₹25 lakh or more to other lenders or asset reconstruction companies (ARCs), lenders must internally conduct a “comprehensive investigation from a wilful default perspective”.

Wilful Defaulters

RBI asks banks and other lenders to hunt down wilful defaulters