Knowledge Base

Who is a Wilful Defaulter

Wilful Defaulter in India

Who is a Wilful Defaulter?

As per RBI Guidelines, a wilful defaulter is an entity or a person (borrower) who has not met the payment or repayment obligations to the lender despite having the ability to do so.

What do you mean by Wilful Default?

The word ‘default’ here refers to a failure to repay the loan taken. A wilful default, therefore, occurs when there is non-payment of a loan availed by a borrower from a bank or any other financial institution despite having the ability to pay it off. Additionally. diversion of funds for purposes other than the ones stated is also grounds to be declared a wilful defaulter.

Also, RBI has stated that a ‘default’ is said to be categorized as ‘wilful default’ only if it comes across as intentional, deliberate, and calculated.

Origin of the Concept of Wilful Default

The concept of Wilful Default originated in the year 1999 when the Central Vigilance Commission and the RBI issued instructions to the banks and other financial institutions to gather information on wilful defaulters of Rs. 25 lakhs and above.

Notably. with a rise in the Non-Performing assets, RBI was forced to strengthen the regulation with respect to wilful defaulters. However, various alterations were made by the RBI in their policies to identify the wilful defaulters.

Additionally, the RBI also issued guidelines on the procedures that should be initiated against them. However, in 2015, RBI finally issued a master circular stating clear instructions and directions to the banks and other financial institutions on identifying and dealing with wilful defaulters.
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Scope of Wilful Default

As per RBI Guidelines, the scope of wilful default is wide and it covers the following areas:

  • Deliberate Non-Payment of the Loan despite having Adequate Cash Flow
  • Diversion or Siphoning of Funds harming the Health of the Lender Entity
  • Misuse of Assets and Proceeds
  • Misrepresentation / Falsification of Records
  • Disposal of Securities without the Bank’s Knowledge
  • Fraudulent transactions by the borrower

Diversion of Funds

Diversion of funds refers to the utilization of funds by a borrower that is in deviation of the sanctioned terms of the lender. Additionally, it includes:

  • Short Term Working Capital Funds utilized for Long Term Purposes
  • Loan Granted for Purchase of Specific Assets utilized for Other Purposes/ Activities
  • Transferring Funds to Subsidiaries or Group Companies or Other Corporates by whatever modalities
  • Routing Funds through any bank other than the Lender Bank without the permission of the Lender Bank
  • Investing Loan Amount in Other Companies and Acquiring Equity/ Debt Instruments without the permission of the Lender Bank
  • A shortfall in the Deployed Funds and the Difference Amount is Unaccounted for.
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Siphoning of Funds

Siphoning of Funds refers to any funds borrowed from a bank or any other financial Institution, utilized for purposes that are not related to the operations of the borrower which harms the financial health of the entity or of the lender. However, the decision as to an instance amounting to Siphoning of Funds lies with the Lender. The decision is based on objective facts and circumstances of the case.

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Cut-off Limits that Attract Penal Measures

As per RBI Guidelines, the penal measures would normally be attracted by all the borrowers or promoters who are involved in Diversion or Siphoning of Funds. However, the Central Vigilance Commission has fixed the present limit at Rs. 25 Lakhs. Under this, cases of wilful default by a bank or any Financial Institution amounting to Rs. 25 Lakhs and above should be reported to the RBI as mentioned in the circular. The same limit is applicable for Diversion or Siphoning of Funds

Measures to Check Correct Use of Funds

In the case of Project Financing in Banks or any Financial Institutions, it is important to check the end use of the fund. This refers to checking the way in which the borrower uses the funds granted by the lender. Notably, the borrower must use the loan amount for the reason specified in the application. Needless to say, as part of their loan policy, banks and financial institutions need to ensure that the funds allotted are used correctly.  To this end, appropriate measures should be put in place. The following are some of the measures that the lenders can take for monitoring and ensuring end-use of funds:

-Scrutiny of Quarterly Progress Reports

-Scrutiny of Operating Statements and Balance sheets of the borrowers

-Regular Inspection of the Borrowers’ Assets

-Scrutiny of the Books of Accounts of the Borrowers maintained with other banks

-Regular in-person visits to the assisted units

-Periodical Stock Audit to check the working capital finance

-Periodical Audit of the Credit function of the lenders
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Penal Action Against a Wilful Defaulter

There are Four Legislations to conduct action against a defaulter:

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFESI) Act– Gives Lender Bank the power to take control of the management of the business of the wilful defaulter

The Companies Act – For Punishment of Fraud. It also allows for prosecution of the directors, jail term and fines

Insolvency and Bankruptcy Code (IBC)– Includes mechanism for resolution of the default loan. It also has penal provisions and disqualifications of defaulters

Indian Penal Code (IPC)– For Punishment for fraud mainly in terms of misappropriation of property

How to Identify a Wilful Defaulter?

The RBI Master Circular dated July 01, 2015 helps identify a wilful defaulter. The mandates of the circular are as follows-

  • When a unit has defaulted in meeting the payment or repayment obligations to the lender despite having the ability to do so.
  • If the unit has defaulted in meeting the payment or repayment obligations to the lender and not utilizing the funds for the stated purposes and diverted funds for other purposes
  • If the funds become untraceable
  • When a Unit has defaulted in meeting the payment or repayment obligations to the lender and have disposed or removed the movable fixed assets or immovable property given for the purpose of securing the loan without the prior permission of the lender

Top 10 Wilful Defaulters in India

The wilful defaulter data released by the RBI comes from the centralized banking system database called Central Repository of Information on Large Credits include wilful defaulters of Rs. 5 Crore and above.

The following are the Top 10 Wilful Defaulters in India:

  • Gitanjali Gems– Wilful default of Rs. 5,044 crore
  • REI Agro– Wilful default of Rs. 4,197 crore
  • Winsome Diamonds– Wilful default of Rs. 3,386 crore
  • Ruchi Soya– Wilful default of Rs. 3,225 crore
  • Rotomac Global– Wilful default of Rs. 2,844 crore
  • Kingfisher Airlines– Wilful default of Rs. 2,488 crore
  • Kudos Chemie– Wilful default of Rs. 2,326 crore
  • Zoom Developers– Wilful default of Rs. 2,024 crore
  • Deccan Chronicle– Wilful default of Rs. 1,951 crore
  • ABG Shipyard– Wilful default of Rs. 1,875 crore

What happens to a Wilful Defaulter?

The following are the consequences which an entity or person will have to face if they are declared a Wilful Defaulter:

  • No Bank or Financial Institution will provide any further finance to wilful defaulters
  • Any Entrepreneurs/ Promoters who have been declared a Wilful Defaulter for Diversion of Funds, Siphoning of Funds, Misappropriation of Funds, etc will be debarred from institutional finance and floating new ventures for a period of five years from when they are declared a Wilful Defaulter in the list published by the RBI
  • The lender can initiate criminal proceedings against wilful defaulters, depending on the case and amount of wilful default
  • Further, the Banks/ Financial Institutions may adopt a pro-active approach for a change of management of the wilfully defaulting borrower unit.
  • As per section 29A – IBC 2016, a wilful defaulter cannot be a resolution applicant.


A tremendous increase in Non-Performing Assets is crippling the Banks and other Financial Institutions. Therefore, taking appropriate and swift action against wilful defaulters is the need of the hour. Additionally, RBI must do the needful to lay down strict and comprehensive policies by issuing circulars addressing the current issues which will put a better system in place that will not only identify but also clips the wings of these wilful defaulters. However, an increase in the level of scrutiny will guarantee that further finance will not be made available to the wilful defaulters that are draining the funds of the Banks/Financial Institutions.

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by Kavitha Iyer

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