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There are many people and entities who borrow money from lending institutions but fail to repay. However, not all of them are called wilful defaulters. As is embedded in the name, a wilful defaulter is one who does not repay a loan or liability, but apart from this there are other things that define a wilful defaulter. According to the RBI, a wilful defaulter is one who–
(i) is financially capable to repay and yet does not do so;
(ii) or one who diverts the funds for purposes other than what the fund was availed for;
(iii) or with whom funds are not available in the form of assets as funds
have been siphoned off;
(iv) or who has sold or disposed the property that was used as a security to obtain the loan.
Diversion of fund includes activities such as using short-term working capital for long-term purposes, acquiring assets for which the loan was not meant for and transferring funds to other entities. Siphoning of funds means that funds were used for purposes that were not related to the borrower and which could affect the financial health of the entity.
However, a lending institution cannot term an entity or an individual a wilful defaulter for a one-off case of default and needs to take into account the repayment track record. The default should be established to be intentional and the defaulter should be informed about the same. The defaulter should also be given a chance to clarify his stand on the issue. Also, the default amount needs to be at least Rs.25 lakh to be included in the category of wilful defaults.
If an entity’s or individual’s name figures in the list of wilful defaulters, the following restrictions get in action on them—
(i) Barred from participating in the capital market.
(ii) Barred from availing any further banking facilities and to access financial institutions for five years for the purpose of starting a new venture.
(iii) The lenders can initiate the process of recovery with full vigour and can even initiate criminal proceedings, if required.
(iv) The lending institutions may not allow any person related to the defaulting company to become a board member of any other company as well.