RBI proposes stringent norms for wilful defaulters

The Reserve Bank on Thursday proposed tighter norms for treatment of wilful defaulters under which banks and other lenders will be required to examine all accounts with outstanding amount of Rs 25 lakh and more to see if the borrower is deliberately not repaying the loan.

The central bank has issued a 'Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters' on which comments have been invited till October 31.

According to Reserve Bank of India (RBI), the draft Master Direction expands the scope for regulated entities which can classify borrowers as wilful defaulters and broadens the definition of wilful default.

It also 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, as per the central bank.

Further, the draft mentions about the treatment of wilful default loans sold to Assets Reconstruction Companies (ARCs) and their status under the Insolvency and Bankruptcy Code.

Wilful default by a borrower would be deemed to have occurred when the borrower defaults in meeting payment/ repayment obligations despite the capacity to honour the loan repayment obligations, as per the draft.

Wilful default also means diversion the funds availed under the credit facility from lender; siphoning off the funds; disposable of immovable or movable assets provided as security; and refusal to honour equity infusion commitment.

Further, the draft said that a wilful default on part of a guarantor would be deemed to have occurred if he/she does not honour the guarantee when invoked by the lender despite having sufficient means to make payment of the dues.

"The lender shall examine the wilful default aspect in all accounts with outstanding amount of Rs 25 lakh and above or as may be notified by RBI 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...," the draft said.

The draft has also proposed that in respect of accounts where wilful default was not observed during the initial examination, the aspects regarding wilful default should be subsequently re-examined in terms of the board approved policy of the lender at a periodicity as may be specified by the board.

According to the draft, the provisions regarding large defaulters would apply to all entities regulated by RBI, irrespective of whether they fall within the definition of 'lender'.

The draft has also proposed norms on treatment of defaulted loans sold to the other lenders and ARCs, and accounts where resolution is done under IBC/ resolution framework guidelines issued by RBI.

"The lenders shall report as wilful defaulters/large defaulters, as the case may be, the details of guarantors who have failed to honour the commitments thereunder when invoked," it said.

To prevent wilful defaults, the draft said in the cases of project financing, lenders should ensure end use of funds by, inter alia, obtaining certification from chartered accountants for the specified purpose.

"The lenders must not depend solely on the certificates issued by the chartered accountants but also strengthen their credit risk management system and internal controls to enhance the quality of their loan portfolio," it noted.

In case any falsification of accounts is observed by the lender and the auditors are found to be negligent or deficient in conducting the audit, the lender concerned should consider lodging a formal complaint against the statutory auditors of the borrowers with NFRA and ICAI to fix the accountability of the auditors concerned.

NFRA is the National Financial Reporting Authority (NFRA) and ICAI is the Institute of Chartered Accountants of India (ICAI).