The Reserve Bank of India (RBI) on Thursday proposed that lenders should label defaulting borrowers as ‘wilful defaulters’ within six months of an account being classified as a non-performing asset (NPA).

The RBI identifies ‘wilful defaulters’ as those who have the ability to honour a bank’s loan dues but do not or divert bank funds.

Earlier, the central bank had no specific timeline within which such borrowers had to be identified. 

A wilful defaulter, or any entity with which a wilful defaulter is associated, will not get any additional credit facility from any lender and will not be eligible for restructuring of credit facility, the RBI said in its circular.

The RBI has proposed that non-banking finance companies (NBFCs) should also be allowed to tag accounts using the same parameters. 

In its draft master directions, the RBI has also suggested that banks should set up a review committee and allow the borrower up to 15 days to make a written representation, as well as a chance for in-person hearing if needed.

Once an account is identified as defaulting wilfully, banks should not grant additional credit to the borrower till a year after the tag is taken off, the RBI said.

The central bank also said that lenders would need to complete an investigation into a defaulting account to determine or rule out ‘wilful default’ before transferring it to another lender or an asset reconstruction facility.

The directions also aim to put in place a system to disseminate credit information about wilful defaulters for cautioning lenders to ensure that further institutional finance is not made available to them,” the circular added.

With the RBI aiming to set tighter norms for treatment of wilful defaulters, 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.

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). 

The RBI said that stakeholders can give feedback on the draft rules till October 31 through email (wdfeedback@rbi.org.in) with the subject line ‘Feedback on Master Direction “Treatment of Wilful Defaulters and Large Defaulters’.