⇥ A "wilful
default" is deemed to have occurred if any of the
following events is noted:-
a) Default in repayment obligations by the unit to the
lender even when it has the capacity to honour the said
b) Default in repayment obligations by the unit to the
lender and has not utilized the finance from the lender
for the specific purposes for which finance was availed
of but has diverted the funds for other purposes.
c) Default in repayment obligations by the unit to the
lender and has siphoned off the funds so that the funds
have not been utilized for the specific purpose for
which finance was availed of, nor are the funds
available with the unit in the form of other assets.
d) Default in repayment obligations by the unit to the
lender and has also disposed off or removed the movable
fixed assets or immovable property given by it for the
purpose of securing a term loan without the knowledge of
⇮ Diversion and
siphoning of funds
• Diversion of funds referred to para 01(b) above, would
a) utilization of short-term working capital funds for
long-term purposes not in conformity with the terms of
b) deploying borrowed funds for purposes / activities or
creation of assets other than those for which the loan
c) transferring funds to the subsidiaries / Group
companies or other corporate by whatever modalities;
d) routing of funds through any bank other than the
lender bank or members of consortium without prior
permission of the lender;
e) investment in other companies by way of acquiring
equities / debt instruments without approval of lenders;
f) shortfall in deployment of funds vis-à-vis the
amounts disbursed / drawn and the difference not being
• Siphoning of funds referred to at para 01(c) above is
construed to occur if any funds borrowed from banks /
FIs are utilized for purposes un-related to the
operations of the borrower, to the detriment of the
financial health of the entity or of the lender.
• The identification of the willful default should be
made keeping in view the track record of the borrowers
and should not be decided on the basis of isolated
transactions/incidents. The default to be categorized as
willful must be intentional, deliberate and calculated.
Willful Default by Guarantor
Reserve Bank has now added a
further provision that guarantors, who refuse to fulfill
their obligations to banks despite having adequate
resources, will also be treated as willful defaulters.
Once branded a willful defaulter, a person or entity
cannot access institutional credit. Such a person cannot
hold office of director.
“In case the... guarantor refuses to comply with the
demand made by the creditor/banker, despite having
sufficient means to make payment of the dues, such
guarantor would also be treated as a wilful defaulter,”
an RBI circular said.
However, this will be applicable prospectively and
not to cases where guarantees were taken prior to the
“Banks/financial institutions may ensure that this
position is made known to all prospective guarantors at
the time of accepting guarantees,” the central bank
said. Elaborating, the RBI said where a banker has made
a claim on the guarantor on account of the default made
by the principal debtor, the liability of the guarantor
is immediate. A guarantor could be individual or a
Also, in cases where guarantees furnished by the
companies within the Group on behalf of the wilfully
defaulting units are not honoured when invoked by the
banks and financial institutions, such Group companies
should also be reckoned as wilful defaulters, the
With an aim to deal firmly with wilful defaults in
payment of bank loans such as Kingfisher, the government
is also planning to come out with a separate legislation
in the next session of Parliament.
As per the Contract Act 1872, the liability of surety is
“co-extensive” with that of the principal debtor, unless
it is otherwise provided by the contract. Therefore, the
RBI said when a default is made in making repayment by
the principal debtor, the banker will be able to proceed
against the guarantor or surety even without exhausting
the remedies against the principal debtor.
Lenders have to inform the RBI about guarantors
while reporting willful default cases.
Off-Balance sheet Items :
⇪ Now, even off-balance sheet
transactions such as guarantees, letters of credit,
derivatives will be covered instead of just the banking
transactions for the purpose of defining a wilful
defaulter. In cases where guarantees have been furnished
by companies within the group on behalf of the wilful
defaulter, the banks and FIs can treat these companies
too as wilful defaulters.
In cases where guarantees
furnished by the firms within the group on behalf of the
wilfully defaulting units are not honoured when invoked
by the banks, such group firms should also be considered
as wilful defaulters.
DBOD.No.CID.BC.3/20.16.003/2014-15 dated July 1, 2014.
RBI/2014-15/221 DBOD.No.CID. 41/20.16.003/2014-15
September 9, 2014
Reporting to RBI / Credit Information
➽ Banks/FIs are required to submit to Credit Information
Bureau (India) Ltd. (CIBIL) the list of suit-filed
accounts of wilful defaultrs of ₹ 25 lakh and above as
at end-March, June, September and December every year
and a quarterly list of wilful defaulters where suits
have not been filed to RBI.
Banks and FIs need not report cases where outstanding
amount falls below ₹ 25 lakh and cases where banks have
agreed for a compromise settlement and the borrower has
fully paid the compromised amount.
➽ Banks and FIs take suitable steps to report the names of
current directors as also the directors who were
associated with the company at the time the account was
classified as defaulter to put other banks and FIs on
guard. The names of independent and nominee directors
are also be included with suitable distinguishing
remarks as applicable.
• The penal measures are
applicable to any willful defaulter with an outstanding
balance of Rs. 25 lakh or more. This limit of ₹ 25 lakh may also be applied for the purpose of taking
cognizance of the instances of 'siphoning' / 'diversion'
• List of willful defaulters (non-suit filed accounts)
and list of willful defaulters (suit filed accounts) are
forwarded to SEBI by RBI and Credit Information Bureau
(India) Ltd. (CIBIL) respectively so as to prevent the
access to the capital markets by the willful defaulters.
• Banks and FIs are required to initiate penal measures
against the identified wilful defaulters as under:-
• No additional facilities should be granted by any bank
/ FI to the listed wilful defaulters.
• The entrepreneurs / promoters of companies where banks
/ FIs have identified siphoning / diversion of funds,
misrepresentation, falsification of accounts and
fraudulent transactions should be debarred from
institutional finance from the scheduled commercial
banks, Development Financial Institutions, Government
owned NBFCs, investment institutions etc. for floating
new ventures for a period of 5 years from the date the
name of the wilful defaulter is published in the list of
wilful defaulters by the RBI.
• Initiation of legal process including criminal
proceedings, wherever necessary, against the borrowers /
guarantors and foreclosure of recovery of dues
• Banks and FIs should adopt a proactive approach for a
change of management of the wilfully defaulting borrower
Banks and FIs should put in place a transparent
mechanism for the entire process so that the penal
provisions are not misused and the scope of such
discretionary powers is kept to the barest minimum. It
should also be ensured that a solitary or isolated
instance is not made the basis for imposing the penal
Guarantees furnished by group companies :-- In cases
where a letter of comfort and / or the guarantees
furnished by the companies within the Group on behalf of
the wilfully defaulting units are not honoured when
invoked by the banks / FIs, such Group companies should
also be reckoned as wilful defaulters.
Role of Auditors
In case it is noticed that there exists falsification of
accounts on the part of the borrowers and the auditors
were negligent or deficient in conducting the audit,
they should lodge a formal complaint against the
auditors of the borrowers with the Institute of
Chartered Accountants of India (ICAI) to enable the ICAI
to examine and fix accountability of the auditors.
For monitoring the end use of funds, in case the lender
desires a specific certification from the borrower’s
auditors regarding diversion /siphoning of funds by the
borrower, the lender should award a separate mandate to
the auditors for the purpose. Appropriate covenants may
be incorporated in the loan agreements to enable award
of such certification by auditors.