Introduction:
The Reserve Bank of India (“RBI”) has proposed a transparent mechanism to identify and declare borrowers as Wilful Defaulters. The Central Bank issued the ‘Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters’ (“Master Direction” or “Direction”) on September 21, 2023, on which stakeholder comments have been invited till October 31, 2023.
The primary objective of the Master Direction is to provide a transparent procedure which is compliant with the principles of natural justice for classifying a borrower as a wilful defaulter by the lenders. The directions also aim to put in place a system to disseminate credit information of wilful defaulters to alert prospective lenders.
Key Takeaways from the Master Direction:
- Wilful Defaulter and Large Defaulter defined
As per the directions, a borrower with an outstanding amount of INR 25 lakh and above, and who has committed wilful default, shall be said to be a Wilful Defaulter. Likewise, if the default amount is INR 1 crore and above, the borrower shall be held as a large defaulter.[1]
- Principles of Natural Justice to be followed
The directions of the Hon’ble Supreme Court in the State Bank of India & Ors. v. Rajesh Agarwal & Ors,[2] have been incorporated in the draft guidelines. The principle of Audi Alteram Partem has been enshrined in the directions, implying that borrowers will be henceforth given the right of personal hearing before being declared as Wilful Defaulters.[3] The Review Committee, constituted by the Lender, will have to consider the proposal of the Identification Committee, along with a written representation from the borrower before passing a reasoned decision.[4]
- Debarment of Credit Facility to Wilful Defaulter
The directions prescribe that no Wilful Defaulter shall be granted additional credit facility. Also, even after the name of the Wilful Defaulter has been removed from the List of Wilful Defaulters (“LWD”) by the lender, the bar on additional credit facility shall be effective up to a period of one year.[5]
- Compromise settlement of LWD Accounts
The Master Direction allows borrowers to shake off the Wilful Defaulter tag by entering into a compromise settlement with banks. Any account included in LWD, where the lender has entered into a compromise settlement with the borrower, shall be removed from the LWD after the compromise amount is paid.[6]
- Reporting and Dissemination of Credit Information
All lenders have been mandated to submit a list of large and Wilful Defaulters to all Credit Information Companies (“CIC”) on a monthly basis. The CICs will in turn provide credit institutions with access to the list of non-suit filed accounts of large defaulters and also display the list of suit-filed accounts of large defaulters on their website.[7]
Directions will inculcate financial discipline among borrowers:
The Indian banking system is beleaguered with Non-Performing Assets (“NPA”). Banks in India have classified as many as 16,044 borrowers with a cumulative debt of INR 3,46,479 crore in the wilful default category till 2022.[8] After the implementation of the Master Direction, lenders will have to complete the process of identifying and tagging borrowers as Wilful Defaulters within six months of their loans turning bad;[9] implying that the defaulters will either have to settle their accounts clean or they won’t be extended any further credit and may face penal sanctions. As a wind of change, these directions will arm lenders with ammunition to fight against wilful defaulters.
Conclusion:
By way of this direction, the RBI has sought to put in place an arrangement whereby banks and financial institutions attempt to reduce the number of wilful defaults by borrowers and penalise them for defaulting by disseminating credit information among other institutional lenders to caution them and ensure that further bank finance is denied to such borrowers who have been declared as Wilful Defaulters. In a balancing act, borrowers shall also have the right of personal hearing, to protect them from arbitrary use of power by the lenders.
However, there is no doubt that in the current economic scenario, the Master Direction will act as an important aid, having a significant impact on the growth of India’s financial system and availability of credit facility in the market.
For further information, please contact:
Sara Sundaram, Partner, Cyril Amarchand Mangaldas
sara.sundaram@cyrilshroff.com
[1] Para 3(1) (l) and Para 3(1)(u), Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters.
[2] State Bank of India v. Rajesh Agarwal, 2023 SCC OnLine SC 342.
[3] Para 4(1)(a)(v), Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters.
[4] Para 4(1)(a)(viii), Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters.
[5] Para 5(3)(a), Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters.
[6] Para 11(1), Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters
[7] Para 9 and 10, Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters.
[8] Banks may have to settle with some of the 16,044 wilful default accounts with Rs 346,479 crore debt till end-2022 | Business News – The Indian Express
[9] Para 4(2) (a) and Para 3(1)(u), Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters.
