The RBI issued ‘Master Directions on Treatment of Wilful Defaulters and Large Defaulters’ on July 30, 2024 (“Master Directions”). These Master Directions have come into effect on October 28, 2024, and are applicable to banks, NBFCs (middle layer and above) and All India Financial Institution (AIFI). The reporting requirements extend to ARCs and Credit Information Companies, while provisions re large defaulters and further financial accommodation to wilful defaulters apply to all RBI regulated entities.

We have set out below key provisions that may be of significance:

1. Timeline for classification – The RBI has now prescribed a timeline for classification of borrowers as wilful defaulters. If a wilful default is observed by lenders in their internal preliminary screening, the classification process of the borrower as a wilful defaulter must be completed within 6 months of the borrower being designated as NPA.
2. Failure to infuse equity by the promoters as additional ground of wilful default – The Master Directions now include an additional criterion for classifying a borrower as a wilful defaulter – if a lender has extended a loan or concessions based on the borrower or its promoter’s commitment to infuse equity, and the borrower or promoter fails to do so despite having the ability to do so. Consequently, lenders are now obligated to classify the borrower as a wilful defaulter if the borrower or its promoters do not fulfill their commitments of shortfall undertaking/ sponsor undertakings to meet the shortfall.
3. Covenant in the agreement – Lenders are now required to include additional covenants in their loan agreements stating that: (i) the borrower shall not induct a person, whose name appears in the list of wilful defaulter, as in charge and responsible for the management of the affairs of the entity; (ii) the lenders will not renew/ enhance/ provide fresh facilities or restructure existing facilities provided to the borrower until any promoter, director or person in charge and responsible for the management of the affairs of the borrowing entity, remains in the list of wilful defaulters.
4. Penal measures against associated entities – In addition to the wilful defaulters themselves, entities associated with wilful defaulters will face restrictions on availing additional facilities (till the end of 1 year after removal from the list of wilful defaulters) or facilities for floating new ventures (till the end of 5 years after removal from the list of wilful defaulters) or restructuring their existing facilities (till the end of 1 year after removal from the list of wilful defaulters). The Master Directions provides guidance on companies/ entities that would be deemed associated.
5. Policy and guideline requirements – The Master Directions require the lenders’ board approved policy to set out amongst other details of constitution of relevant identification and review committees, terms of compromise settlement with wilful defaulters, threshold for commissioning a forensic audit against a wilful defaulter, and guidelines for nominating authorized officials who would issue show cause notice and serve written order on behalf of the committees.