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Treatment of Wilful Defaulters and Large Defaulters

Reserve Bank of India (RBI) had issued the directions on treatment of wilful defaulters and large defaulters.

To whom shall the directions be applicable?

The directions shall be applicable to the following Regulated Entities (REs) –

  • Commercial Banks 
  • Small Finance Banks (SFBs)
  • Local Area Banks (LABs)
  • Regional Rural Banks (RRBs)
  • Primary (Urban) Co-operative Banks (UCBs)
  • Rural Co-operative Banks –
    • State Co-operative Banks (StCBs)
    • Central Co-operative Banks (CCBs)
  • All India Financial Institutions (AIFIs) regulated by RBI –
    • Export Import Bank of India (EXIM Bank)
    • National Bank for Agriculture and Rural Development (NABARD)
    • National Housing Bank (NHB)
    • Small Industries Development Bank of India (SIDBI)
    • National Bank for Financing Infrastructure and Development (NaBFID)
  • Non-Banking Financial Companies (NBFCs) categorized as Middle Layer and above layers –
    • Deposit taking NBFC (NBFC-D)
    • NBFC-Investment and Credit Companies (NBFC-ICC)
    • NBFC-Factor 
    • NBFC-Micro Finance Institutions (NBFC-MFI) 
    • NBFC-Infrastructure Finance Company (NBFC-IFC) 
    • Infrastructure Debt Fund-NBFC (IDF-NBFC) 
    • Housing Finance Company (HFC) 
    • Core Investment Company (CIC) 
  • Asset Reconstruction Companies (ARCs)

To whom shall the directions not be applicable?

The directions shall not be applicable to –

  • Mortgage Guarantee Company (MGC)
  • NBFC-Peer to Peer Lending Platform (NBFC-P2P) 
  • NBFC-Account Aggregator (NBFC-AA)
  • Standalone Primary Dealer (SPD) 
  • Non-Operative Financial Holding Company (NOFHC) 
  • NBFC not availing public funds and not having any customer interface

Who are lenders as per the directions?

Lender means any of the following entities which has granted a credit facility to the borrower.

  • Commercial Banks including SFBs, LABs and RRBs but excluding Payments Banks
  • Scheduled UCBs
  • Non-scheduled UCBs falling under Tier 3 and 4
  • AIFIs regulated by RBI – EXIM Bank, NABARD, NHB, SIDBI, NaBFID
  • NBFCs falling under Middle Layer and above layers

What is credit facility?

Credit facility means any fund based or non-fund-based facility, including off-balance sheet items like derivatives, guarantees and letters of credit, which a lender has extended to the borrower.

What is wilful default?

Wilful default shall be deemed to have occurred when –

  • Borrower defaults in meeting payment / repayment obligations to the lender.
  • Guarantor does not honour the guarantee when invoked by the lender.

and any one or more of the following features are noticed –

Conditions / features Applicable to Borrower Applicable to Guarantor
Has the capacity to honour the said obligations.

Ö

Ö
Has diverted the funds availed under the credit facility from lender.

Ö

 NA
Has siphoned off the funds availed under the credit facility from lender.

Ö

 NA
Has disposed of immovable / movable assets provided for securing the credit facility without the approval of the lender.

Ö

Ö
Has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment.

Ö

Ö

Who is wilful defaulter?

Wilful defaulter means –

  • A borrower or a guarantor who has committed wilful default and the outstanding amount is ₹25 lakh and above.
  • Where the borrower or a guarantor committing the wilful default is a company, its promoters and the directors.
  • In case of an entity (other than a company), persons who are in charge and responsible for the management of the affairs of the entity.

Who is large defaulter?

Large defaulter means a defaulter with an outstanding amount of ₹1 crore and above and –

  • Where suit has been filed, or
  • Whose account has been classified as doubtful or loss 

What is diversion of fund?

Diversion of funds means and includes –

  • Utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction of credit facility.
  • Deploying funds availed using credit facility for the creation of assets other than those for which the credit was sanctioned.
  • Transferring funds availed using credit facility to the subsidiaries / group companies or other entities, by whatever modality, without approval of the lender / all the lenders in the consortium.
  • Routing of funds through any lender other than the lender or members of consortium without prior written permission of the lender / all the lenders of consortium.
  • Investing funds availed using credit facility in other companies / entities by way of acquiring equities / debt instruments without the approval of the lender / all the lenders of consortium.
  • Shortfall in the deployment of funds vis-à-vis the amounts disbursed / drawn under the credit facility and the difference not being accounted for.

What is siphoning of funds?

Siphoning of funds shall be construed to have occurred if any funds availed using credit facility from lenders are utilised for purposes unrelated to the operations of the borrower.

What is Identification Committee and Review Committee?

  • Identification Committee means the committee constituted by a lender for identifying a wilful defaulter.
  • Review Committee means the committee constituted by a lender for reviewing the proposal of the Identification Committee. Review Committee shall not be comprised of members who are part of the Identification Committee.

Lenders Composition of Identification Committee Composition of Review Committee
Commercial Banks (other than foreign banks), SFBs, LABs and AIFIs Whole-Time Director (WTD) other than the Managing Director and Chief Executive Officer (MD & CEO) or CEO or equivalent official as chairperson and 2 senior officials as members, not more than 2 ranks below the chairperson of the committee.
In case, there is only 1 WTD other than the MD & CEO or CEO or equivalent official, such WTD may be part of the review committee if the post of MD & CEO or CEO or equivalent official is vacant. In such cases an official 1 rank below the WTD may chair the identification committee, with 2 senior officials as members, not more than 1 rank below the chairperson of the committee. 		WTD who is the MD & CEO or CEO or equivalent official as chairperson and 2 independent directors or non-executive directors or equivalent officials as members.
Where the post of MD & CEO or CEO or equivalent official is vacant, the Review Committee shall be constituted with a WTD in place of MD & CEO or CEO or equivalent official. In such cases, Review Committee shall be chaired by independent directors or non-executive directors or equivalent officials.
Commercial Banks (other than foreign banks) In respect of credit facilities below a threshold, an Identification Committee may be set up with an officer just below the rank of WTD as chairperson and 2 senior officials as members, not more than 2 ranks below the chairperson of the committee.
Multiple identification committees may be formed. 		In respect of credit facilities below a threshold, a Review Committee may be constituted with an officer of the rank of WTD or equivalent official as the chairperson and 2 senior officials as members, not more than 2 ranks below the chairperson of the committee.
Multiple review committees may be formed.
Foreign Banks An officer not more than 1 rank below the Country Head / CEO as chairperson and 2 senior officials, not more than 2 ranks below the chairperson of the committee, as members. Country Head / CEO as chairperson and 2 senior officials, not more than 1 rank below the chairperson of the committee, as members.
RRBs An officer not more than 1 rank below the chairman of the RRB as chairperson and 2 senior officials, not more than 2 ranks below the chairperson of the committee, as members. Chairman of the RRB shall be the chairperson of the committee and 2 directors nominated under clause 9.1(a) or 9.1(d) of the Regional Rural Banks Act, 1976 shall be the members.
UCBs An officer not more than 1 rank below the MD / CEO as chairperson and 2 senior officials, not more than 2 ranks below the chairperson of the committee, as members. MD / CEO as the chairperson, and 2 professional directors as members.
NBFCs MD / CEO as chairperson with 2 independent directors or non-executive directors or equivalent officials, as members.

What is the mechanism for identification and classification of wilful defaulters?

A lender shall identify and classify a person as a ‘wilful defaulter’ as per the following procedure –

  • The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. 
  • The evidence of wilful default shall be examined by an Identification Committee.
  • If the Identification Committee is satisfied that an event of wilful default has occurred, it shall issue a show-cause notice to borrower / guarantor / promoter / director / persons who are in charge and responsible for the management of the affairs of the entity, and call for the submissions within 21 days of issuance of show cause notice. 
  • After considering the submissions, the Identification Committee shall make a proposal to the Review Committee for classification as a wilful defaulter.
  • The borrower / guarantor / promoter / director / persons who are in charge and responsible for the management of the affairs of the entity shall thereafter be suitably advised about the proposal to classify them as wilful defaulter.
  • An opportunity shall be provided to borrower / guarantor / promoter / director / persons who are in charge and responsible for the management of the affairs of the entity for making a written representation to Review Committee within 15 days of such a proposal from the Identification Committee.
  • The proposal of the Identification Committee along with the written representation received shall be considered by the Review Committee.
  • The Review Committee shall provide an opportunity for a personal hearing also. However, if the opportunity is not availed or if the personal hearing is not attended by the borrower / guarantor / promoter / director / persons who are in charge and responsible for the management of the affairs of the entity, the Review Committee shall, after assessing the facts or material on record, take a decision.
  • The borrower / guarantor / promoter / director / persons in charge and responsible for the management of affairs shall not have the right to be represented by a lawyer.
  • The Review Committee shall pass a reasoned order and the same shall be communicated to the wilful defaulter.

What are the directions on review of accounts for identification of wilful default?

  • A lender shall examine the ‘wilful default’ aspect in all Non-Performing Assets (NPA) accounts with outstanding amount of ₹25 lakh and above. 
  • If wilful default is observed in the internal preliminary screening, the lender shall complete the process of classification / declaring the borrower as a wilful defaulter within 6 months of the account being classified as NPA.
  • In respect of accounts where ‘wilful default’ was not observed during the initial examination, the aspects regarding ‘wilful default’ shall be subsequently re-examined in terms of the Board approved policy of the lender.

What measures shall be taken against wilful defaulters?

  • Based on the facts and circumstances of each case, a lender can examine whether initiation of criminal proceedings against wilful defaulters is warranted.
  • A lender shall formulate a non-discriminatory board-approved policy that sets out the criteria based on which the photographs of persons classified and declared as wilful defaulter shall be published.
  • No additional credit facility shall be granted by the lender to the wilful defaulter or any entity with which the wilful defaulter is associated, for 1 year after the name of the wilful defaulter has been removed from the List of Wilful Defaulters (LWD) by the lenders.
  • No credit facility shall be granted by the lender for floating of new ventures to the wilful defaulter or any entity with which the wilful defaulter is associated, for 5 years after the name of wilful defaulter has been removed from the LWD by the lenders.
  • The lender shall, wherever warranted, initiate legal action against the borrowers / guarantors for foreclosure / recovery of dues expeditiously.

What are the liabilities of a guarantor?

  • As per Section 128 of the Indian Contract Act, 1872, the liability of the guarantor is coextensive with that of the principal debtor unless it is otherwise provided by the contract.
  • When a default happens in making payment / repayment by the principal debtor, a lender shall be able to proceed against the guarantor even without exhausting the remedies against the principal debtor.
  • In case the said guarantor refuses to comply with the demand made by the lender, such guarantor shall also be considered for classification as a wilful defaulter.
What are the directions on reporting of credit information?
  • REs shall submit information to all credit information companies (CICs) in respect of the large defaulters at monthly intervals –
    • List of suit filed accounts of large defaulters
    • List of non-suit filed accounts of large defaulters whose account has been classified as doubtful or loss
  • REs shall submit at monthly intervals, information to all CICs in respect of the wilful defaulters –
    • LWD in respect of suit filed accounts
    • LWD in respect of non-suit filed accounts
  • REs shall inform all CICs the removal of the name of the wilful defaulter from the LWD within 30 days from the date when the outstanding amount falls below the threshold of ₹25 lakh.
  • Any account included in LWD, where the lender has entered into a compromise settlement with the borrower, shall be removed from the LWD only when the borrower has fully paid the compromise amount even if the outstanding amount becomes less than the threshold of ₹25 lakh after part payment.
  • REs shall report to CICs the details of guarantors who have failed to honour the commitments thereunder when invoked, as large defaulters / wilful defaulters, as the case may be.


References

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (All India Financial Institutions – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12971&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Asset Reconstruction Companies – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12928&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Commercial Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13144&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Local Area Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13067&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Non-Banking Financial Companies – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12946&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Regional Rural Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13042&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Rural Co-operative Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12991&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Small Finance Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13112&Mode=0

Reserve Bank of India. (2025, November 28). 'Reserve Bank of India (Urban Co-operative Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13017&Mode=0


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