India: Regulations On Wilful Defaulters: Consolidated By RBI

Last Updated: 9 April 2015
Article by Arpita Bose

Most Read Contributor in India, September 2016


Being a developing country, India has felt the waves of liberalization and globalization since 1991. It soon leads to a compelling requirement of financial system and thus gave a spur to the credit requirement in the market. As the volume of credit, credit agencies and credit beneficiaries increased manifold, a simultaneous increase in the risks and fraud associated with the credits also followed. A need was felt by the Authorities for surveillance of such delinquencies. CIBIL (Credit Information Bureau (India) Limited), India's first credit information Bureau, was set up in the year 2001 jointly by banks and financial institutions. The establishment of CIBIL was with the motive of improving the financial system thereby reducing the chances of Non Performing Asset (NPA).

A scheme was framed by Reserve Bank of India (RBI) in April, 1999 wherein the banks and notified financial institutions were required to submit to RBI the details of willful defaulters who made defaults of Rs. 25 lakhs and above. Further, wilful default hovered in the financial system and then the Reserve Bank of India, in consultation with the Government of India, constituted in May 2001, a Working Group on Wilful Defaulters (WGWD).

The Reserve Bank of India has been issuing various circulars from time to time to the banks/FIs with regard to dissemination of credit information pertaining to the wilful defaulters. All these circulars were consolidated in the Master Circular on Wilful Defaulters dated 1st July 2013. It was prepared to ensure that all the existing instructions on the subject were incorporated and consolidated in a single document and is available for the use of the banks/FIs.


The Master circular defines that the "wilful default" would be deemed to have occurred if any of the following events is noted:

a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honor the said obligations.


  • The term 'lender' appearing in the circular covers all banks/FIs to which any amount is due, provided it is arising on account of any banking transaction, including off-balance sheet transactions such as derivatives, guarantee and Letter of Credit;
  • The term 'unit' appearing therein has to be taken to include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In case of business enterprises (other than companies), banks/FIs may also report (in the Director column) the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise;
  • While dealing with wilful default of a single borrowing company in a Group, the banks /FIs should consider the track record of the individual company, with reference to its repayment performance to its lenders. However, in cases where guarantees furnished by the companies within the Group on behalf of the wilfully defaulting units are not honoured when invoked by the banks /FIs, such Group companies should also be considered as wilful defaulters;
  • RBI clarification was issued on 9th September, 2014: When a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/ surety even without exhausting the remedies against the principal debtor. As such, where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter. It is clarified that this would apply only prospectively and not to cases where guarantees were taken prior to this circular Banks/FIs may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees;

b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

Explanation: Diversion of funds, include any one of the under noted occurrences:

  • utilization of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;
  • deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned;
  • transferring funds to the subsidiaries / Group companies or other corporate by whatever modalities;
  • routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;
  • investment in other companies by way of acquiring equities / debt instruments without approval of lenders;
  • Shortfall in deployment of funds vis-ŕ-vis the amounts disbursed / drawn and the difference not being accounted for.

c) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.


Siphoning of funds, is construed to occur if any funds borrowed from banks / FIs are utilized for purposes un-related to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgment of the lenders based on objective facts and circumstances of the case. The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorized as wilful must be intentional, deliberate and calculated.

The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.

End-use of Funds

In cases of project financing, the banks/FIs seek to ensure end use of funds by, inter alia, obtaining certification from the Chartered Accountants. The banks and FIs, should not depend entirely on the certificates issued by the Chartered Accountants but strengthen their internal controls and the credit risk management system to enhance the quality of their loan portfolio.

d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.


There is no minimum amount prescribed in order to declare a borrower as willful defaulter, however, for reporting purposes RBI has set certain limits:

  1. All cases of wilful default (non-suit filed accounts) with outstanding of Rs. 25 lakh & above are required to be reported to RBI on quarterly basis only upto September 2014. Thereafter, banks/FIs may continue to furnish data in respect of wilful defaulters to Credit Information Companies as per Credit Information Companies (Regulation) Act, 2005 on a monthly or a more frequent basis. This would enable such information to be available to the banks/FIs on a near real time basis.
  2. Banks/FIs should submit the list of suit-filed accounts of wilful defaulters of Rs. 25 lakh & above as at end-March, June, September and December every year to a credit information company.

Keeping in view the present limit of Rs. 25 lakh fixed by the Central Vigilance Commission for reporting of cases of wilful default by the banks/FIs to RBI, any wilful defaulter with an outstanding balance of Rs. 25 lakh or more, would attract the penal measures as stipulated by RBI in its circular i.e.:

  1. No additional facilities will be granted by any bank/FI to the listed wilful defaulters. In addition, the entrepreneurs / promoters of companies where banks/FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI.
  2. The legal process, wherever warranted, against the borrowers/guarantors and foreclosure of recovery of dues will be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary.
  3. Wherever possible, the banks and FIs will adopt a proactive approach for a change of management of the wilfully defaulting borrower unit.
  4. A covenant in the loan agreements, with the companies in which the banks/notified FIs have significant stake, should be incorporated by the banks/FIs to the effect that the borrowing company should not induct a person who is a promoter or director on the Board of a company which has been identified as a wilful defaulter.


The Master Circular issued by RBI specifically requires the banks/FIs to put in place a transparent mechanism for the entire process so that the scope of the circular is not misused and discretionary powers are not conferred upon banks/FIs.

It stipulates that the decision to classify a borrower as wilful defaulter should be entrusted to committee of higher functionaries of the bank/FI concerned, headed by the Executive Director and consisting of two other senior officers of the rank of GM/DGM.

Further, the classification of the wilful defaulters should be based on documents and supported by requisite evidence and also it should clearly specify the reasons for which the borrower has been declared as defaulter.

The borrower is also required to provide a reasonable time to the borrower for making representation against the decision of the committee. Classification of a borrower as wilful defaulter is required to be done by the higher authorities with a second screening at the level of highest authority of the bank/FI when a representation is made by the borrower. The procedure provides the borrower with ample opportunity to present his case before he is declared as wilful defaulter.


The objective of RBI to formulate instructions is aimed to curb the menace of non-performing assets in banks and to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to minimum.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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