The Reserve Bank of India (RBI) has refused to give more time for banks to classify an errant borrower as ‘wilful defaulter’ because a long process runs the risk of bringing down the value of the stressed assets.

The RBI a fortnight back told banks that the classification of a wilful defaulter  must be completed within six months. A loan account first turns into a non-performing asset (NPA) when the interest or principal or both is overdue for more than 90 days.

According to the RBI, a ‘wilful defaulter’ is a borrower or guarantor who has the financial capacity to pay but has deliberately not honoured it, by diverting or siphoning funds away from the intended projects.

Bankers have realised that such borrowers delay the process and take to legal recourse. 

Identifying a wilful defaulter takes time, after it goes for examination to an internal committee in the bank, comprising an whole-time director other than the managing director and CEO. This is then sent to the review committee, consisting of the bank CEO and two independent or non-executive directors as members. Based on the interaction with the promoter and the senior members of the defaulting company, the review committee passes a ‘reasoned order’ and communicates it to the borrower.

As per the RBI circular in June this year, banks may “have a non-discriminatory board-approved policy that clearly sets out the criteria based on which the photographs of persons classified and declared as wilful defaulter shall be published”. 

Recently, the RBI listed 2,664 companies as wilful defaulters who have collectively failed to repay loans amounting to Rs 1.96 lakh crore as of March 2024. This trend raises concerns about the financial health of India’s corporate sector and the potential risks posed by them to the banking system.