The Reserve Bank of India (RBI) has denied banks’ request for an extension of the timeframe for declaring a borrower as a wilful defaulter. This decision reinforces the RBI’s commitment to addressing the issue of wilful defaults promptly and efficiently.
A wilful defaulter is a borrower who deliberately avoids repaying loans despite having the financial capacity to do so. Such defaults pose a significant risk to the banking system and can erode the value of assets.
Currently, banks follow a well-defined process for identifying and declaring wilful defaulters. This process involves several steps, including internal committee reviews and opportunities for the borrower to present their case. However, this process can be lengthy, and borrowers sometimes employ delaying tactics to avoid being declared as wilful defaulters.
Banks had requested more time to complete this process, arguing that it could take up to a year after an account is classified as a non-performing asset (NPA). However, the RBI has mandated that the entire process must be completed within six months.
The RBI’s decision is driven by the need to protect the interests of lenders and prevent the erosion of asset value. Delaying the declaration of wilful defaulters can give borrowers more time to divert funds or dispose of assets, making it more difficult for banks to recover their dues.
The RBI also emphasized the sensitive nature of wilful defaults, which can sometimes involve political or influential figures. Prompt action is necessary to minimize the risk of borrowers fleeing or influencing the process.
The process for declaring a wilful defaulter involves multiple stages, starting with an internal “identification committee” that reviews the case. If the committee suspects wilful default, the matter is escalated to a “review committee” which includes the bank’s CEO and independent directors.
The borrower is given an opportunity to present their case during a personal hearing. If the review committee determines that the default is wilful, a reasoned order is issued and communicated to the borrower.
The RBI’s decision to shorten the timeframe for declaring wilful defaulters is expected to strengthen the banking system’s ability to address this issue effectively. By taking prompt action against wilful defaulters, the RBI aims to protect the interests of lenders and maintain the integrity of the financial system.