No loans for one year after removal from list of wilful defaulter: RBI

In a concerted effort to curtail the escalating issue of wilful default, the Reserve Bank of India has mandated a comprehensive scrutiny of all non-performing accounts possessing an outstanding balance of at least Rs 25 lakh. This directive extends to banks and other lending institutions. Furthermore, a stringent prohibition on the extension of new credit facilities has been imposed on individuals classified as a wilful defaulter for a period of one year subsequent to their removal from the defaulter’s list. These stringent measures are slated to come into effect within a period of ninety days.

The central bank’s newly issued master direction empowers lenders to identify and categorize borrowers as wilful defaulters, subjecting them to a rigorous examination process. To be classified as such, a borrower must have intentionally and deliberately defaulted on a loan amounting to Rs 25 lakh or more. A specialized identification committee will be responsible for evaluating the evidence of wilful default.

The directive mandates that lenders undertake a thorough assessment of the ‘wilful default’ aspect within all non-performing asset accounts exceeding the Rs 25 lakh threshold. A stipulated timeframe of six months has been allotted to lenders to complete the classification process for borrowers suspected of wilful default.

Prior to transferring a defaulted loan exceeding Rs. 25 lakh to another financial institution, the original lender must conduct a comprehensive investigation to determine if the borrower is a wilful defaulter. While this investigation does not require a formal two-step committee process, it must rigorously examine the loan for any indicators of wilful default.

If the investigation identifies the borrower as a wilful defaulter, the lender must officially classify them as such and report this to the credit information companies (CICs) before selling the loan. The details of this classification must be shared with the institution purchasing the loan, who will then be responsible for continuing to report the borrower as a wilful defaulter to the CICs.

Importantly, selling a defaulted loan to another financial institution does not count as recovering the loan for the purpose of determining if the borrower should be classified as a wilful defaulter. The loan is considered outstanding until it is fully repaid.

The institution that purchases the defaulted loan must continue to classify the borrower as a wilful defaulter until the total amount owed, including any portion written off by the previous lender, falls below Rs. 25 lakh. This requirement is subject to any modifications issued by the Reserve Bank of India.

To ensure transparency and accountability, lenders are required to establish a non-discriminatory, board-approved policy outlining the criteria for publicizing the photographs of individuals designated as wilful defaulters. The central bank has emphasized that the primary objective of these guidelines is to establish a fair and transparent procedure for classifying borrowers as wilful defaulters, adhering to principles of natural justice.

By disseminating credit information about wilful defaulters, the Reserve Bank aims to create a robust system that alerts lenders to the creditworthiness of such individuals, thereby preventing the extension of further financial support.

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