Wilful defaulter label: Usage by banks

In the recent past, the declaration of borrowers as wilful defaulters has been an effective tool for prevention and recovery of non-performing assets. Once a borrower is reckoned as a wilful defaulter by a bank or another financial institution, dire consequences follow. Wilful defaulters are barred from obtaining additional financial facilities, promoters of wilful defaulter companies are barred from raising finance to float new ventures, and banks and financial institutions are entitled to initiate penal action against wilful defaulters.

Master circular

The whole process of declaring a borrower as a wilful defaulter and taking necessary actions is solely controlled by banks and financial institutions. Since there is a possibility that banks and financial institutions may misuse their powers while declaring a borrower as a wilful defaulter, the Master Circular on Wilful Defaulters dated 1 July 2014 contains numerous provisions which require banks and financial institutions to put a transparent mechanism in place and take decisions only after careful consideration and due caution.

In cases before certain high courts, it has been contended that a bank’s action in declaring a person as a wilful defaulter was premature. In light of the serious consequences described above, it is imperative that decisions taken under the master circular are prudently taken and are backed by necessary evidence.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.