The Reserve Bank of India (RBI) on Thursday directed lenders to declare a borrower as a 'wilful defaulter' within six months of the account being classified as a non-performing asset (NPA).

The lender shall examine the 'wilful default' aspect in all accounts with outstanding amount of ₹25 lakh and above or as may be notified by the Reserve Bank of India from time to time, and complete the process of classification of the borrower as a wilful defaulter within six months, the banking regulator says in its draft master directions.

"No additional credit facility shall be granted by any lender to a wilful defaulter or any entity with which a wilful defaulter is associated," the central bank says.

The bar on additional credit facilities will be effective up to a period of one year after the name of the wilful defaulter has been removed from the List of Wilful Defaulters (LWD) by the lender.

No credit facility will be granted for floating new ventures by any lender to a wilful defaulter or any entity with which a wilful defaulter is associated for a period of five years after the name of the wilful defaulter has been removed from the LWD by the lender, the central bank says.

The RBI further says that a lender must complete the investigation from a wilful default angle in every case before transferring the credit facility to another lender or an asset reconstruction company.

"The primary objective of these directions is to provide for a non-discriminatory and transparent procedure, while complying with the principles of natural justice for classifying a borrower as a wilful defaulter by the lenders," the banking regulator says. The guidelines 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.

Based on the facts and circumstances of each case, lenders can examine whether criminal action against wilful defaulters under the provisions of the applicable law, is warranted, the banking regulator says.

"If the wilful defaulter is a natural person, all entities in which he is associated as promoter, or director, or as one in charge and responsible for the management of the affairs of the entity shall be deemed to be associated," it says.

Wilful defaulters will not be eligible for restructuring of the credit facility.

In March this year, the Supreme Court held that borrowers must be given an opportunity to be heard before their accounts are classified as ‘fraud’ by banks. The SC bench noted that classifying accounts as fraud results in serious criminal and civil consequences for borrowers and amounts to "blacklisting" which impacts credit scores. The RBI's master circular in 2016 allowed banks to unilaterally classify accounts of wilful defaulters as 'fraudulent'. The top court said that a reasoned order must be passed by the bank while classifying an account as fraudulent, as it will act as a "check on the arbitrary exercise of powers." The principles of natural justice demand that the borrowers must be served notice, given an opportunity to explain the conclusions in the forensic audit report and be allowed to represent the banks and joint lenders forum before their accounts are classified as fraud, the top court said.

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