RBI’s final guidelines on the classification of wilful defaulters

RBI’s final guidelines on the classification of wilful defaulters

Context:

The Reserve Bank of India (RBI) has issued final guidelines on the classification of wilful defaulters, directing lenders to identify and tag such borrowers within six months of the loan turning bad. These guidelines aim to standardize the process and ensure transparency in handling wilful defaulters, applicable to banks, non-banking financial companies (NBFCs), and financial institutions like Exim Bank and Nabard.

Relevance:
GS-03 (Economy)

Key Highlights:

  • Final Guidelines Issued: RBI has released comprehensive guidelines on identifying and tagging wilful defaulters.
  • Timeline: Lenders are required to complete the identification process within six months of the loan becoming non-performing.
  • Applicability: The guidelines apply to banks, NBFCs, Exim Bank, and Nabard.
  • Previous Consultations: The guidelines were formulated after considering feedback from stakeholders and various judicial rulings.
  • Robust Mechanisms: The guidelines emphasize a transparent and non-discriminatory approach, incorporating measures to enhance credit discipline and deter deliberate defaults.
  • Current Data: As of 31 March, the total outstanding wilful default stands at ₹3.6 trillion according to TransUnion Cibil.

Who is a Wilful Defaulter?

  • A borrower is classified as a wilful defaulter if they default on loans despite having the capacity to repay.
  • This classification also applies to those who divert or siphon off funds from the credit facility provided by the lender.
  • The identification process considers the borrower’s track record and ensures that the default is intentional, deliberate, and calculated.

What are Bad Loans?

  • Bad loans, also known as non-performing assets (NPAs), are loans in which the borrower has defaulted on repayments.
  • These are loans that have remained unpaid for a specified period, typically 90 days or more, and are considered unlikely to be recovered fully by the lender.

Significance:

  • Financial System Integrity: Strengthening the process of identifying wilful defaulters helps maintain the integrity of the financial system.
  • Credit Discipline: Clear guidelines and robust reporting mechanisms aim to enhance credit discipline among borrowers.
  • Deterrence: The measures are expected to deter deliberate defaults, ensuring better compliance and repayment behavior.
  • Transparency: Ensuring a transparent and non-discriminatory approach upholds the principles of natural justice.
  • Economic Stability: By addressing wilful defaults effectively, the guidelines contribute to the overall economic stability and health of the banking sector.