Declaring Non-Performing Assets and Wilful Defaulter

Introduction
Non-Performing Assets consist of those loans which cease to generate income for the bank,
as they have become overdue for more than 90 days. Since the bank’s main source of income
depends on interest generated on the loan, if there is a rise in the ratio of a banks Non-
Performing Assets then banks profitability and its ability to lend is significantly hindered.
The Reserve Bank of India’s 2015 Master Circular on “Wilful Defaulters” defines the term as
any unit which ‘Wilfully Defaults’. A Wilful default would deemed to have occurred if any of
the following events occur (A unit indicates individuals, juristic persons and all other forms
of business enterprises) :-
a) The unit has defaulted in meeting its payment/repayment obligations to the lender
even when it has the capacity to honour the said obligations1
b) The unit has defaulted in meeting its payment/repayment obligations to the lender and
has not utilized the finance from lender for the specific purpose for which the finance
was availed but diverted the funds for other purposes2
c) The unit has defaulted in meeting its payment/repayment obligations to the lender and
has siphoned off the funds so that funds have not been utilized for the specific
purpose for which finance was availed of, nor are the funds available with the unit in
form of other assets3
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 for purpose of securing a term loan without knowledge of the bank/lender.4
In simple terms wilful defaulters are those who would not pay back the borrowed sum to the
banks even if they have the capacity to honour the repayment obligation.

Historic Perspective
To introduce credit discipline amongst financial intuitions, the Reserve Bank of India (RBI)
in 1990 introduced a reporting mechanism to keep a check on the increasing Non-Performing
Assets, by introducing strict measures against wilful defaulters. The RBI in 1999 set out
guidelines requiring Financial Institutions to report Non-Preforming Assets (NPA) amounting
to 25 Lakhs or greater, to RBI on a quarterly basis. Yet, the 8th report by Parliament’s
Standing Committee on Financial Institutions found out that the 1999 guidelines of RBI was
inadequate to stop the wilful default menace. Therefore, it recommended formulation of a
database containing credit information as well as important information regarding wilful
defaulters and the information on group of companies and promoters who have mis-utilized
the funds. Further it recommended strict measures such as filing criminal cases against such
and denial of further credit for such companies.5

1
Master Circular, 2015. Para 2.1.3(a)
2
Master Circular, 2015, Para 2.1.3 (b)
3
Master Circular, 2015, Para 2.1.3(c)
4
Master Circular, 2015, Para 2.1.3(d)
5
Anubhav Chakravorty, RBI Guidelines on Wilful defaulters available at
https://www.gravitaslegal.co.in/articles-demo-detail.php?pid=38
The Credit Information Bureau (India) Limited (CIBIL) was established in 2001, to maintain
and rate units on their credit scores, based on their past repayment performance.
Subsequently, in 20005 the Government of India also notified the Credit Information
Companies (Regulations) Act, 2005. RBI in 2006 consolidated all instructions and guidelines
with respect to Wilful Defaulters in the Master Circulars of Wilful Defaulters. The Master
Circular has been regularly revised and recommendation of various stakeholders have been
incorporated. Major changes were brought in the Master Circular of 2015, where the RBI
guidelines elaborated that the lending institutions had the power to declare an entity to have
wilfully defaulted. Further RBI in 2016 and Central Vigilance Commission in 2018, has
directed banks to report fraud cases to the local police station and Central Bureau of
Investigation (CBI).6

Declaration of NPA and Wilful Defaulters

Para 3 of the 2015 Master Circular of RBI provides for a detailed procedure to identify wilful
defaults7 :-
(a) The evidence of wilful default on the part of the borrowing company and its
promoter / whole-time director at the relevant time should be examined by a
committee headed by an Executive Director or equivalent and consisting of two other
senior officers of the rank of GM / DGM.
(b) If the Committee concludes that an event of wilful default has occurred, it shall issue
a Show Cause Notice to the concerned borrower and the promoter / whole-time
director and call for their submissions and after considering their submissions issue an
order recording the fact of wilful default and the reasons for the same. An opportunity
should be given to the borrower and the promoter / whole-time director for a personal
hearing if the Committee feels such an opportunity is necessary.
(c) The Order of the Committee should be reviewed by another Committee headed by the
Chairman / Chairman & Managing Director or the Managing Director & Chief
Executive Officer / CEOs and consisting, in addition, to two independent directors /
non-executive directors of the bank and the Order shall become final only after it is
confirmed by the said Review Committee. However, if the Identification Committee
does not pass an Order declaring a borrower as a wilful defaulter, then the Review
Committee need not be set up to review such decisions.
Para 5 of the Master Circular deals with reporting the names of persons who have defaulted
or the names of directors of the companies who have defaulted. These names are to be
declared to the RBI as well as the Credit Information Companies. Para 5.3 provides that the
name of the director of a government corporation cannot be revealed instead “government of
the respective undertaking’ should be mentioned. Further, Para 5.4 provides for correct
identification of director through their Director Identification Number (DIN), which was
introduced by Ministry of Corporate Affairs.

Conclusion

6
Anubhav Chakravorty, RBI Guidelines on Wilful defaulters available at
https://www.gravitaslegal.co.in/articles-demo-detail.php?pid=38
7
Master Circular, 2015, Para 3
RBI recently came out with “Reports on trends and progress of banking”, which indicated
that Non- Performing Assets have declined significantly while wilful defaulters accounts had
seen an alarming increase8. Thus, the regulations in place need adaptation in order to ensure
greater stability of Indian financial system.

8
George Mathew and Hitesh Vyas, “Bad loans down but wilful default accounts shoot up”, 15-03-2023,
available at https://indianexpress.com/article/business/banking-and-finance/bad-loans-down-but-wilful-
default-accounts-shoot-up-8497364/