Final Guidelines on Wilful Defaulters Released: Highlights of the Changes to the Draft

The RBI has released the Master Direction on Wilful Defaulters, delineating the regulatory framework and procedures for classifying borrowers as willful defaulters. The draft comprehensive guideline was earlier released for comments in September 2023. Based on feedback received, the following changes have been made to the draft:

• The identification committee has been specified on the basis of the type of entity, i.e., commercial banks, foreign banks, UCBs, NBFCs, and RRBs. Provision has been made for commercial banks (other than Foreign Banks, Small Finance Banks, LABs, and RRBs) to form multiple identification committees. The requirement that the committee shall not be chaired by the person who sanctioned the credit facility and shall not include any person who was a member of the credit sanctioning committee has been done away with.
• The definition of ‘large defaulter’ was redrafted to include cases where a suit has been filed.
• The explanation added to the definition of ‘nominee director’ in the case of the corresponding new bank and the State Bank of India has been removed.
• The constitution of the review committee has been clearly classified to bring clarity to the designation of the members according to the type of organisation. Similar to the identification committee, the requirement that the chairperson shall not be the person who sanctioned the credit facility or has acted as a member of the sanctioning committee has been removed.
• Within the mechanism for identification and classification of wilful defaulters, a timeline of 21 days has been added to respond to the show cause notice issued by the identification committee. In addition, since the process is in house, it has been clarified that there shall be no right to be represented by a lawyer.
• In the penal measures, a provision has been made to cease the operation of such measures on the associated entities when they are no longer associated with the wilful defaulters.
• The requirement in the draft that the instructions on guarantor shall apply with effect from September 9, 2014, has been removed.
• With respect to the reporting and dissemination of credit information on wilful defaulters in case of reclassification of NBFC in the Middle layer or above or a Non-Scheduled UCB falling under Tier 3 or 4 following the scale-based regulation criteria for NBFCs or Revised Regulatory Framework for UCBs, they shall no longer be eligible to classify their borrowers as wilful defaulters but should continue to furnish updates pertaining to historical data submitted by them to the CICs.

The draft as well as the final guidelines require a ‘reasoned order’ on the willful defaulter to be passed by the review committee, which was reiterated by the Bombay High Court in Milind Patel v. Union Bank of India and Ors. [WP No.3671 of 2023] dated March 4, 2024.