- The RBI, recently released the Draft Master Direction on the Treatment of Wilful Defaulters expanding the very definition of wilful defaulters, and mandating lenders to complete identification process within six months of loan being classified as nonperforming.
- The Draft has significant implications for both, Indian financial institutions and the business fraternity. It is designed to address issues related to wilful/large defaulters, aiming to strengthen the credit discipline among borrowers while safeguarding the interests of banks and financial institutions. It applies to banks, nonbanking financial companies (NBFCs) and other all India financial institutions.
- In February 2016, the RBI introduced a framework (Master Directions on Frauds) for dealing with wilful defaulters which essentially provided guidelines for identifying and reporting wilful defaulters and further laid down punitive measures for such borrowers and their promoters.
- The revised framework represents a departure from previous practices in several ways. Firstly, it extends the prohibition on additional credit facilities for wilful defaulters up to one year after their removal from the List of Wilful Defaulters (LWD), whereas the previous practice didn’t indicate such a specific timeline.
Wilful defaulter
A “Wilful default” would be deemed to have occurred if any of the following events is noted:-
- The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.
- The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
- The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
- The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.