Q.16 Write a note on the official criteria regarding the term ‘wilful defaulter’ and also discuss the regulatory norms which apply on such individuals/entities.

Ans. There are many individuals/entities who borrow money from lending institutions but fail to repay. However, not all of them are called wilful defaulters. As per the provisions of the RBI, 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—

(i) Who 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.

If an entity’s or individual’s name figures in the list of wilful defaulters, the following restrictions get in action on them—

(a) Barred from participating in the capital market.

(b) Barred from availing any further banking facilities and to access financial institutions for five years for the purpose of starting a new venture.

(c) The lenders can initiate the process of recovery with full vigour and can even initiate criminal proceedings, if required.

(d) The lending institutions may not allow any person related to the defaulting company to become a board member of any other company as well.