Changes in RBI’s new Master Direction for wilful defaulters

The Reserve Bank of India (RBI) has released a revised draft Master Direction for Treatment of Wilful Defaulters. The draft Master Direction expands the scope for regulated entities which can classify borrowers as wilful defaulters, broadens the definition of wilful default, refines the identification process and mandates a review and finalisation on wilful default aspects within six months of an account being classified as a non-performing asset.

It also addresses the treatment of wilful default loans sold to Assets Reconstruction Companies and their status under the Insolvency and Bankruptcy Code.

What has changed?

Earlier, the Marster Direction on wilful defaulters was meant for scheduled commercial banks and financial institutions only. The revised Direction has expanded the scope and is applicable to lenders (banks, NBFCs, and financial institutions), asset reconstruction companies and credit information companies.

Asset Reconstruction Companies (ARCs), and Credit Information Companies (CICs) will be bound by these Directions only with regard to the reporting requirements.

The definition of Wilful defaulter now also includes those borrowers who have failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity as the lender has provided loans or certain concessions to the borrower based on this commitment.

A guarantor will be considered willful defaulter if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues.

The new Direction introduces the concept of large defaulter, who is a person or entity which has defaulted on a payment of Rs 1 crore or more.

Identification of wilful defaulters

The lender shall examine the ‘wilful default’ aspect in all accounts with outstanding amount of ₹25 lakh and above or as may be notified by Reserve Bank of India from time to time, and complete the process of classification/ declaring the borrower as a wilful defaulter within six months of the account being classified as NPA

In respect of accounts where ‘wilful default’ was not observed during the initial examination, the aspects regarding ‘wilful default’ shall be subsequently re-examined in terms of the board approved policy of the lender at a periodicity as may be specified by the board

Reporting of wilful default

All lenders shall submit at monthly intervals, information to all CICs in respect of the wilful defaulters.

The lender, or the ARC to which the account has been transferred, shall inform all CICs the removal of the name of the wilful defaulter from the List of Wilful Defaulters (LWD), promptly and not later than 30 days, from the date when the outstanding amount falls below the threshold of ₹25 lakh or as notified by Reserve Bank of India from time to time.

Every CIC shall display the suit-filed and non-suit filed accounts of LWD on its website.

(Suit filed accounts shall mean those accounts in respect of which lenders regulated by the Reserve Bank have approached courts or tribunals (including under Insolvency and Bankruptcy Code, 2016) for recovery of their dues, and proceedings are pending.)

Cases of wilful defaults at overseas branches of banks incorporated in India shall be reported, if such disclosure is not prohibited under the laws of the host country.

Treatment of compromise settlements

Any account included in LWD, where the lender has entered into a compromise settlement with the borrower, shall be removed from the LWD only when the borrower has fully paid the compromise amount.

Till such time as only part payment is made, name of the borrower shall not be removed from the LWD even if the outstanding amount becomes less than the threshold of ₹25 lakh or as notified by Reserve Bank of India from time to time. The compromise settlement with the wilful defaulter shall be in terms of the board approved policy of the lender.

Treatment of defaulted loans sold to the other lenders and ARCs

The lender shall complete the investigation from a wilful default angle in every case before transferring the credit facility to other transferees.

In a case where wilful default is established, lenders shall report it in the LWD to CICs before selling the asset to other lenders/ ARCs.

The details of the reporting done must be conveyed to other lenders/ ARCs and they shall be responsible for reporting it to the CICs thereafter.

Sale to other lenders/ ARCs shall not be treated as recovery, as the loan amount is not yet recovered.

The “transferee” lenders/ ARCs shall continue to report the account as a wilful defaulter until the balance remaining to be recovered in their account plus the amount written off by the “transferor” lender falls below the threshold of ₹25 lakh or as notified by Reserve Bank of India from time to time.

Treatment of accounts where resolution is done under Insolvency and Bankruptcy Code (IBC)

In case an account which is included in LWD and has subsequently undergone a resolution under IBC resulting in a change in the management and control of the entity/ business enterprise, the name of such a wilful defaulter shall be removed from the LWD after implementation of the resolution plan under IBC or aforesaid prudential framework.

The penal measures shall not be applicable to entities/ business enterprises after implementation of the resolution plan under IBC or aforesaid prudential framework.

The penal measures include: Debarment from availing institutional finance, ineligibility from restructuring of loans, initiation of legal actions, etc.

Also Read: Scourge of being identified as wilful defaulter, and the remedies