Mechanism for Identification and Classification of Wilful Defaulters (21.09.2023)

A lender shall identify and classify a person as a ‘wilful defaulter’ by following the procedure enumerated in these Directions.

(a) (i) The evidence of wilful default shall be examined by an Identification Committee.

(ii) 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.

(iii) After considering the submissions and where satisfied, the Identification Committee shall make a proposal to the review committee for classification as a wilful defaulter by explaining the reasons in writing.

(iv) 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 along with the reasons therefor.

(v) 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 against such a proposal within a reasonable time (say 15 days) to the Review Committee.

(vi) The proposal of the Identification Committee along with the written representation received shall be considered by the Review Committee.

(vii) The Review Committee shall provide an opportunity for a personal hearing also to the borrower/ guarantor/ promoter/ director/ persons who are in charge and responsible for the management of the affairs of the entity. 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, including written representation, if any, consider the proposal of the Identification Committee and take a decision.

(viii) The Review Committee shall pass a reasoned order and the same shall be communicated to the wilful defaulter.

Explanation: If the Identification Committee concludes that the borrower/ guarantor/ promoter/ director/ persons who are in charge and responsible for the management of the affairs of the entity, does not qualify for classification as a wilful defaulter, the review committee need not be set up.

(b) (i) Lenders shall formulate the guidelines, based on their board-approved policy, for nominating authorized officers, who would issue the show cause notice and serve written order on behalf of the Identification Committee and Review Committee respectively.

(ii) The show-cause notice and the order served by the authorised officers shall clearly state that this has the approval of the competent authority i.e. identification/review committee.

(c) A non-whole-time director, including an independent director/ nominee director, shall not be considered as wilful defaulter unless it is conclusively established that:

  1. the wilful default by the borrower or the guarantor has taken place with their consent or connivance or

  2. he/ she was aware of the fact of wilful default by the borrower or the guarantor, as revealed from the proceedings recorded in the minutes of the meeting of the Board or a Committee of the Board, but has not recorded his/ her objections to the same.

Penal Charges in Loan Accounts

The Reserve Bank on August 18, 2023 issued a circular on penal charges that banks and other lending institutions can charge in case of non-compliance of loan contract with the borrower. As per the circular issued, penalty, if charged, for non-compliance with terms and conditions of a loan contract by the borrower shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. Further. there shall be no capitalisation of penal charges. The new guidelines will be effective from January 1, 2024. 

Priority Sector Lending (Short Note)

Priority sector refers to those sectors of the economy that are considered important for the development of the basic needs of the country and are assigned priority over other sectors by the Government of India and the Reserve Bank of India (RBI). These sectors include agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, renewable energy, and others. The banks are mandated to encourage the growth of such sectors with adequate and timely credit.

The RBI has issued guidelines for priority sector lending, which specify the targets and sub-targets for different categories of banks and the eligible activities under each sector. The RBI also monitors the performance of banks in achieving these targets and provides incentives and disincentives for compliance or non-compliance. The priority sector lending guidelines aim to harmonise the instructions for different types of banks, align them with emerging national priorities, and support inclusive and sustainable development.