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How to identify a wilful defaulter?

How to identify a wilful defaulter?


[The identification of a ‘wilful defaulter’ is done on the basis of eventual conclusion that the default is intentional, deliberate and calculated. The process of categorizations of  the ‘wilful defaulter’ is required to be done thoughtfully on the basis of track record of the borrower/guarantor and not on the basis of an isolated transaction or incident. The article herein illustrates how the defaulter (borrower, promoters, directors and or guarantor) is identified as a wilful defaulter and consequences upon the borrower, being a declared as  willful defaulter]

When an entity (individual/juristic person or other business enterprise) defaults in discharging its liabilities or declines to fulfill payment commitments with the lenders (Banks/Financial Institutions) despite it has the sufficient repayment capacity, then such borrower entity is construed as wilful defaulter.   Further, an entity may be treated as wilful defaulter when the lender notices any of the following incidents;

(a).The finance received by the borrower for specific purposes is diverted and utilized those funds for other purposes.

(b).The finance made from the lender/s is utilized for the purposes un-related to operation of the borrower, and no funds available with the borrower in the form of other assets.

(c).The movable/immovable assets which are offered as security to the lender for the purpose of availing term loans are disposed-off by the borrower without the knowledge of the lender.

(d).Assets financed either not been purchased or been sold and proceeds have been misutilised by the borrower.

(e). the borrower misrepresented or produced false records or done fraudulent transactions with the bank/FIs to receive the finance.

How a guarantor becomes wilful defaulter?

When repayment is not forthcoming from the principal debtor for any reason, then the lender has the right to call upon the guarantor/surety to repay the money financed by him. The lender at his choice may invoke the guarantee and demand payment from the guarantor with or without exhausting the remedies against the borrower. The lender may also initiate legal proceedings against the guarantor/s, in case the guarantor fails to fulfill the commitments under the contract of guarantee. The guarantor may also be reckoned as willful defaulter if the guarantor fails to fulfill the demands made by the lender, for the payment of dues, despite having sufficient means to make payment of dues.

Upon invoking the letter of comfort and or the guarantee furnished by a group company which refuses to honour the demands made by the lender, then the other units within such group shall also be considered as wilful defaulters along with the defaulted company. However, this rule is applicable prospectively from July 1, 2014 and not for the guarantees furnished before that date.

Consequences of declaring an entity as willful defaulter:

According to various RBI circulars updated till January 07, 2015, no additional facilities should be granted by any bank/FI to the wilful defaulters appearing in the list published by the RBI along with their promoters and directors. However, non-promoter/non-whole time directors (nominee and independent directors) in the management of a company’s debt contract shall be excluded from the willful defaulters list in view of their limited role, except in the rarest circumstances.  The legal proceedings including criminal proceedings against wilful defaulters should be accelerated. In the loan agreement a covenant should be incorporated by the banks and FIs to the effect that the borrowing company should not induct in its board a person whose name is appearing in the defaulter’s list published by RBI. Further, if such a person is already in the board, the company shall take effective step to promptly remove such person from its board.

A statement from Market regulator SEBI on March 12, 2016 said that the wilful loan defaulters along with their promoters and directors are debarred from accessing stock and bond markets for raising funds. The new regulation also prohibits such defaulters taking position in the board of listed firms or taking over another listed company. SEBI communiqué said that the new regulation comes into force shortly as the same is being notified by it.

(8) Comments

  1. THRILOK

    Sir, is there any limit in amount to declare a person as willful defaulter? As I read in RBI manual it mentioned that entities where the outstanding amount is more than 25lakhs are to declared as willful defaulters. Kindly clarify please... From, Thrilok, AM - IOB

    1. Surendra NaikSurendra Naik - Post author

      There is no change in the definition of wilful defaulter. The limit of Rs. 25 lakh fixed by the Central Vigilance Commission for the purpose of reporting of cases of wilful default by the banks/FIs to RBI. The RBI master circular DBR.No.CID.BC.57/20.16.003/2014-15 dated July, 2014 prescribes certain penal actions against wilful defaulters with an outstanding balance of Rs.25 lakh.

  2. surender yadav

    Sir I had taken a home loan of Rs six lakh for ten years under fix rate @8.25%p.a from sarv Haryana gramin bank gurgaon during 2006.However I have already paid Rs.seven lakhs eighty thousand upto Feb.2015.my house was rented and it was only source of income but due to construction of illegal basement by my neighbor my house tilted and partiality collapsed. A legal case is already underway at present against my neighbor but bank did not consider all this and declared us wilful defaulter for Rs. One lakh and thirty thousand.I really do not understand who is defaulter. What should I do now. No authority is ready to listen. Pse advise surender yadav 8800850873

    1. Surendra NaikSurendra Naik - Post author

      As mentioned in the above article, the borrower is treated as wilful defaulter only in the following cases.(a).The finance received by the borrower for specific purposes is diverted and utilized those funds for other purposes. (b).The finance made from the lender/s is utilized for the purposes un-related to operation of the borrower, and no funds available with the borrower in the form of other assets. (c).The movable/immovable assets which are offered as security to the lender for the purpose of availing term loans are disposed-off by the borrower without the knowledge of the lender. (d).Assets financed either not been purchased or been sold and proceeds have been misutilised by the borrower. (e). the borrower misrepresented or produced false records or done fraudulent transactions with the bank/FIs to receive the finance. since any of the above clauses do not apply to you, the bank cannot treat you as wilful defaulter. As you are irregular in loan repayment, you are a defaulter of the loan account. Since the asset secured by the bank is damaged and the dispute is on the court I feel that bank may not take a drastic step to dispose of the property in a hurry. Go and contact the Manager, apprise him again of your difficulties, and try to settle the issue amicably.

      1. surender yadav

        Sir I have noted the rules of willful defaulter and thanks for your advice. Since I have no means of income at present and bank has already inflated my outstanding to Rs 378500/- which we are objecting but bank manager says he is going to teach us a lesson while we're asking them to wait for another six months which he has rejected multiple times. Since we are helpless at the moment and he is trying to make us suffer economically and not ready to listen at all. Could you please assist us by providing further courses of action as I am facing acute shortage of funds. In other words legal expenses do not have.and without money can't fight my case. Sir thanks again surender yadav

        1. Surendra NaikSurendra Naik - Post author

          As on date, there is no solution to your problems. Wait and watch what's the bank is going to do. In the meantime, if you receive notice under SARFAESI Act, send an objection letter (Registered Letter under Ack. due) without delay. You will get further time in the process.

          1. surender yadav

            Sir thanks again for your value able advice .However yesterday visited bank and shocked to note that our outstanding has gone up to Rs 438000/- with in small period of time.and they've already used sarfaesi act against me secretly. However one thing I had forgotten that bring to your knowledge that they had arranged insurance cover of my house loan and debited premium when we've submitted our claims it was rejected. Sir it is the last request what do I do now. thanks again surender yadav

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