In 1999, the Reserve Bank of India implemented a scheme for managing willful defaulters. The guidelines were subsequently combined and incorporated into the Master Circular on Willful Defaulters, which was last updated in July 2015.
The Reserve Bank of India has recently updated its instructions by considering judgements and orders from the Honourable Supreme Court and High Courts, as well as representations and suggestions from banks and other stakeholders. As a result, they have released a draft Master Direction on the Treatment of Willful Defaulters and Large Defaulters dated September 21, 2023.
The draft Master Direction aims to enhance the scope of Regulated Entities to categorise borrowers as willful defaulters. It also seeks to broaden the definition of willful default, improve the process of identifying such defaulters, and require a review and finalisation of willful default aspects within six months of an account being classified as a non-performing asset. It also discusses the handling of intentional default loans that are sold to Assets Reconstruction Companies and their legal standing under the Insolvency and Bankruptcy Code.
The key highlights of the draft guidelines are as follows:
- If a guarantor intentionally fails to fulfil their obligation to honour the guarantee when requested by the lender, even though they have multiple ways to make the necessary payment, it will be considered willful default.
- For accounts where willful default may have been overlooked during the initial assessment, the matters pertaining to willful default should be re-evaluated according to the lender’s board-approved policy at a periodicity set by the board.
- The regulations pertaining to significant defaulters would be applicable to all entities under the supervision of the apex bank, regardless of whether they meet the criteria of a lender.
- It has put in place regulations regarding the handling of defaulted loans that are sold to other lenders and Asset Reconstruction Companies (ARCs), as well as accounts where resolution is achieved under the Insolvency and Bankruptcy Code (IBC) or resolution framework guidelines issued by the central bank.
- To address intentional defaults, lenders should take measures to verify the intended use of funds in project financing cases. This can include obtaining certification from Chartered Accountants (CAs) to confirm the designated purpose.
- In the event that the lender observes any fraudulent manipulation of financial records and discovers that the auditors have failed to fulfil their duties adequately during the audit, it is advisable for the concerned lender to consider filing an official complaint against the statutory auditors of the borrowers with the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI).
Regulated entities and other stakeholders are invited to submit their comments/feedback on the Master Direction on Treatment of Wilful Defaulters and Large Defaulters by October 31, 2023. The Reserve Bank will issue the final Master Direction after considering the feedback received.