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The Reserve Bank of India (RBI) said that it has 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 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. 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 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