RBI Issues Directions on Wilful and Large Defaulters: Strengthening Transparency and Credit Discipline
The Reserve Bank of India (RBI) has issued the Commercial Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025, to establish a comprehensive framework for identifying, classifying, and managing wilful and large defaulters in the banking system. These directions aim to ensure transparency, non-discrimination, and adherence to natural justice while strengthening credit discipline and risk management.
Applicable to all commercial banks, except Small Finance Banks, Regional Rural Banks, Local Area Banks, and Payments Banks, these directions mandate banks to implement Board-approved policies covering thresholds for credit facilities, roles of Identification and Review Committees, periodic account reviews, forensic audit triggers, and guidelines for publishing the photographs of wilful defaulters.
A wilful defaulter is defined as a borrower who deliberately defaults on repayment obligations, with actions that are intentional, calculated, and premeditated. Banks are required to follow a detailed mechanism to classify wilful defaulters. This involves identification by the Identification Committee, issuance of a show-cause notice, consideration of the borrower’s written submissions, and subsequent review by the Review Committee. Importantly, directors not involved in day-to-day management are only held accountable if evidence shows their consent or connivance in the default.
The Directions also emphasize preventive and penal measures. Banks are prohibited from extending additional credit to wilful defaulters and their associated entities, with restrictions extending up to five years even after removal from the List of Wilful Defaulters (LWD). Borrowers must include covenants in credit agreements preventing individuals listed in the LWD from joining management boards. Banks are also encouraged to monitor the end-use of funds, verify certifications, and, where necessary, commission forensic audits to detect fund diversion.
Reporting is a key component. Banks must submit monthly data on wilful and large defaulters to all credit information companies, ensuring timely dissemination. Special provisions apply to compromise settlements, IBC resolutions, and transferred loans to maintain accuracy and accountability. Guarantors and directors are also reported where applicable.
The Directions further define the role of auditors and third parties, holding them accountable in cases of negligence or complicity in wilful defaults. Banks must report such cases to the Indian Banks’ Association, which maintains caution lists for lenders’ reference.
Finally, these Directions repeal previous guidelines on wilful and large defaulters, without affecting ongoing proceedings or obligations, and provide the RBI with authority to issue clarifications and interpretations. Overall, the framework strengthens governance, accountability, and preventive mechanisms in the banking sector, while safeguarding the interests of lenders and promoting financial discipline.
