The Reserve Bank of India (RBI) asked banks to issue show-cause notices to borrowers identified as wilful defaulters, give them a personal hearing, and provide them at least 21 days to reply.
The regulator also directed banks to disclose to the borrower all information on which the show-cause notice is issued to classify them as wilful defaulters. However, it added that the borrower has no right to appoint a lawyer to represent it during the personal hearing.
The final guidelines on the treatment of wilful defaulters and large defaulters, issued Tuesday by the RBI, contain these provisions.
The RBI said that the objective is to provide a transparent process on classifying a borrower as wilful defaulter on principles of natural justice and ensuring that institutional finance is not made available to them.
Wilful defaulters are defined as those who have siphoned off funds or diverted funds or defaulted despite having the capacity to pay.
The RBI has asked banks to form an identification committee which shall issue a show-cause notice with all information while giving borrowers 21 days to reply.
Based on the borrowers’ response, the identification committee shall decide to make a proposal to the review committee on the classification of a borrower as a wilful defaulter. Banks should inform the borrower of the proposal to classify them as wilful defaulters in writing and give them 15 days to submit a written representation to the review committee.
The review committee shall provide the borrower with a personal hearing if the borrower wants.
“As the above classification process is an in-house proceeding, 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,” RBI said. “Review committee shall pass a reasoned order and the same shall be communicated to the wilful defaulter,” it added.
The RBI guidelines also stated that the show-cause notice and the order served by the designated official shall clearly state that this has the approval of the competent authority – identification/ review committee and must identify its members. This follows a recent Bombay High Court order which directed banks to name the employees on committees that identifies a borrower as a wilful defaulter.
Lenders shall examine loans with Rs 25 lakh and above for identification of wilful default. The RBI prohibited from providing any new credit facility to a wilful defaulter or to entities associated with it. Associate entities are defined as those that are subsidiary or joint ventures or defined as associate companies.
Banks are barred from giving any credit to wilful defaulters or their associates to float new ventures for five years after the lender removes their name from the list of wilful defaulters (LWD).
