The Reserve Bank of India (RBI) has come out with draft master directions on the treatment of wilful defaulters and large defaulters. The directions will come into force after 90 days.
These directions, which have broad consequences for financial institutions, borrowers, auditors, and other stakeholders, are based on important financial regulations. The main goal of these guidelines is to create a fair and just procedure for identifying wilful defaulters, in line with natural justice principles. The RBI aims to make it easier for lenders to consider providing additional financial aid to wilful defaulters by facilitating the exchange of credit information about them.
The document contains important clauses pertaining to its applicability to different financial organizations, such as banks, non-banking financial companies (NBFCs), asset reconstruction companies (ARCs), and credit information companies (CICs). In Chapter II, the concept of wilful default is defined, along with the methods for locating and evaluating wilful defaulters. Additionally, it provides for harsh penalties and processes that are transparent. Chapter III discusses the significance of providing accurate and timely information to credit information businesses and outlines the repercussions of failing to do so. Although the document’s primary attention is on wilful defaulters, it also contains measures pertaining to large defaulters that are in line with the RBI’s prudential standards on income recognition, asset categorization, and provisioning.
The functions of identification and review committees, protections for part-time directors, sanctions against wilful defaulters, and guarantors’ liabilities are a few significant elements. It covers the reporting duties to credit information firms and the handling of compromised settlements. In addition, it recognises the importance of third parties, including statutory auditors, in identifying, preventing, and correcting wilful defaults. When necessary, these parties would be held accountable. It also necessitates the reporting of guarantors and directors connected to the borrower and encourages preventive actions during credit appraisal and monitoring, emphasising the accuracy of reporting.