Mechanism for Identification and Classification of Wilful Defaulters
Last Updated: May 2026 Based on RBI Master Directions on Treatment of Wilful Defaulters and Large Defaulters dated July 30, 2024, amended by Amendment Directions 2026 dated April 27, 2026
Latest Update — April 2026: RBI issued Treatment of Wilful Defaulters and Large Defaulters Amendment Directions 2026 on April 27, 2026, introducing a mandatory 6-month timeline for completing the wilful defaulter classification process from the date of NPA classification under the new RBI (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026.
Governing Framework: RBI/DoR/2024-25/122 DoR.FIN.REC.No.31/20.16.003/2024-25 dated July 30, 2024
Applicability: All Commercial Banks (excluding Small Finance Banks, Local Area Banks, Payments Banks and Regional Rural Banks), NBFCs, All India Financial Institutions (EXIM Bank, NABARD), Asset Reconstruction Companies and Credit Information Companies. Separate directions have been issued for Small Finance Banks and Asset Reconstruction Companies.
Key Definitions (as per 2024 Master Directions)
Wilful Default: A wilful default by a borrower is considered to have occurred when the borrower defaults in meeting payment or repayment obligations to the lender and any one or more of the following conditions are met:
A. The borrower has the capacity to honour the obligations but has intentionally failed to do so.
B. The borrower has diverted the funds availed under the credit facility from the lender.
C. The borrower has siphoned off the funds availed under the credit facility from the lender.
D. The borrower has disposed of immovable or movable assets given as security under the credit facility without the knowledge of the lender.
E. The borrower has intentionally failed to infuse equity despite having the ability to do so, as committed to the lender.
Wilful Defaulter: A borrower or guarantor who has committed wilful default and the outstanding amount is ₹25 lakh and above, or as may be notified by RBI from time to time.
Large Defaulter: A defaulter which has an outstanding amount of ₹1 crore and above and where suit has been filed or whose account has been classified as Doubtful or Loss.
Mechanism for Identification and Classification of Wilful Defaulters
A lender shall identify and classify a person as a 'wilful defaulter' by following the procedure enumerated in these Directions. The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions or incidents. The default to be categorized as wilful must be intentional, deliberate, and calculated.
New Timeline Requirement (Amendment Directions 2026): If wilful default is observed in the internal preliminary screening, a bank shall complete the process of classification and declaring the borrower as a wilful defaulter within six months of the account being classified as NPA in accordance with the RBI (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026.
Step-by-Step Procedure:
Step 1 — Examination by Identification Committee:
The evidence of wilful default shall be examined by an Identification Committee constituted by the lender. The committee shall examine all relevant facts, documents, and circumstances relating to the default.
Step 2 — Show Cause Notice:
If the Identification Committee is satisfied that an event of wilful default has occurred, it shall issue a show-cause notice to the borrower, guarantor, promoter, director, or persons who are in charge and responsible for the management of the affairs of the entity, and call for submissions from them within 21 days of issuance of the show cause notice. Lenders shall disclose to them all materials and information on which the show cause notice is based.
Explanation: Director(s) or persons who are in charge and responsible for the management of the affairs of the entity means those who were associated with the company or entity at the time when the acts of omission or commission by the company or entity led to the default.
Step 3 — Proposal to Review Committee:
After considering the submissions, where satisfied, the Identification Committee shall make a proposal to the Review Committee for classification as a wilful defaulter, explaining the reasons in writing.
Step 4 — Advice to Borrower:
The borrower, guarantor, promoter, director, or persons who are in charge and responsible for the management of the affairs of the entity shall thereafter be suitably advised about the proposal to classify them as wilful defaulter along with the reasons therefor.
Step 5 — Written Representation:
An opportunity shall be provided to the borrower, guarantor, promoter, director, or persons who are in charge and responsible for the management of the affairs of the entity for making a written representation to the Review Committee within 15 days of such proposal from the Identification Committee.
Step 6 — Consideration by Review Committee:
The proposal of the Identification Committee along with the written representation received shall be considered by the Review Committee.
Step 7 — Personal Hearing:
The Review Committee shall provide an opportunity for a personal hearing to the borrower, guarantor, promoter, director, or persons who are in charge and responsible for the management of the affairs of the entity. However, if the opportunity is not availed or if the personal hearing is not attended, the Review Committee shall, after assessing the facts or material on record including written representation, if any, consider the proposal of the Identification Committee and take a decision.
Important: As the above classification process is an in-house proceeding, the borrower, guarantor, promoter, director, or persons in charge and responsible for the management of affairs shall not have the right to be represented by a lawyer.
Step 8 — Reasoned Order:
The Review Committee shall pass a reasoned order and the same shall be communicated to the wilful defaulter.
Explanation: If the Identification Committee concludes that the borrower, guarantor, promoter, director, or persons who are in charge and responsible for the management of the affairs of the entity do not qualify for classification as a wilful defaulter, such cases need not be referred to the Review Committee.
Administrative Provisions:
A. Lenders shall formulate guidelines, based on their board-approved policy, designating the rank of the official who would issue the show cause notice and serve written order on behalf of the Identification Committee and Review Committee respectively.
B. The show-cause notice and the order served by the designated official shall clearly state that this has the approval of the competent authority, i.e., Identification or Review Committee, and must identify its members.
Treatment of Non-Whole-Time Directors:
A director other than a whole-time director, including an independent director or nominee director, shall not be considered as a wilful defaulter unless it is conclusively established that:
A. The wilful default by the borrower or the guarantor has taken place with their consent or connivance, or
B. He or she was aware of the fact of wilful default by the borrower or the guarantor, as revealed from the proceedings recorded in the minutes of the meeting of the Board or a Committee of the Board, but has not recorded his or her objections to the same.
The name of a non-whole-time director, independent director, or nominee director who has been classified as a wilful defaulter shall be reported in Annex II indicating that he is a non-whole-time director, independent director, or nominee director.
Consequences of Classification as Wilful Defaulter:
A. Lenders shall not grant additional credit facility to a wilful defaulter or any entity with which a wilful defaulter is associated for 1 year after the name of the wilful defaulter has been removed from the List of Wilful Defaulters (LWD).
B. Wilful defaulters shall not be eligible for restructuring.
C. Lenders shall publish photographs of wilful defaulters as per their board-approved non-discriminatory policy.
D. Lenders must report wilful defaulters to Credit Information Companies (CICs) at monthly intervals.
E. Lenders must report large defaulters to all CICs at monthly intervals including information regarding all suit-filed accounts and non-suit filed accounts classified as Doubtful or Loss.
Reporting Requirements:
A. Lenders must report matters pertaining to wilful defaulters and large defaulters to Credit Information Companies at monthly intervals.
B. Reports shall include information regarding all suit-filed accounts and non-suit filed accounts classified as Doubtful or Loss.
C. Accurate reporting of all associated parties — borrowers, guarantors, directors, promoters — is mandatory.
Preventive Measures Required by Lenders:
A. Rigorous credit appraisal before sanctioning facilities.
B. End-use monitoring of funds disbursed.
C. Involvement of statutory auditors or forensic audits where diversion or siphoning of funds is suspected.
D. Engagement of third parties for verification of end-use of funds in high-value accounts.
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MCQ Practice Questions
1. As per Amendment Directions 2026, banks must complete wilful defaulter classification within how many months of NPA classification?
A. 3 months
B. 6 months
C. 9 months
D. 12 months
Answer: B
Explanation: Amendment Directions 2026 dated April 27, 2026 mandate completion of wilful defaulter classification within 6 months of NPA classification.
2. What is the minimum outstanding amount for classification as a Wilful Defaulter?
A. ₹10 lakh
B. ₹15 lakh
C. ₹25 lakh
D. ₹1 crore
Answer: C
Explanation: A wilful defaulter is defined as a borrower or guarantor with outstanding amount of ₹25 lakh and above.
3. What is the minimum outstanding amount for classification as a Large Defaulter?
A. ₹25 lakh
B. ₹50 lakh
C. ₹75 lakh
D. ₹1 crore
Answer: D
Explanation: Large Defaulter means a defaulter with outstanding amount of ₹1 crore and above where suit has been filed or account classified as Doubtful or Loss.
4. Within how many days must a borrower submit response to show cause notice for wilful default?
A. 7 days
B. 15 days
C. 21 days
D. 30 days
Answer: C
Explanation: The borrower must submit their response to the show cause notice within 21 days of its issuance.
5. For how long after removal from List of Wilful Defaulters (LWD) can no additional credit be granted?
A. 6 months
B. 1 year
C. 2 years
D. 3 years
Answer: B
Explanation: Lenders shall not grant additional credit facility to a wilful defaulter or any associated entity for 1 year after removal from the List of Wilful Defaulters.
6. Can a wilful defaulter be represented by a lawyer in the classification proceedings?
A. Yes, always
B. Yes, only before Review Committee
C. No, as it is an in-house proceeding
D. Yes, with court permission
Answer: C
Explanation: As the classification process is an in-house proceeding, the borrower or associated persons shall not have the right to be represented by a lawyer.
7. Within how many days must the borrower make written representation to Review Committee?
A. 7 days
B. 10 days
C. 15 days
D. 21 days
Answer: C
Explanation: An opportunity shall be provided to the borrower to make written representation to the Review Committee within 15 days of the Identification Committee's proposal.
8. The 2024 Master Directions on Wilful Defaulters are applicable to which of the following?
A. Commercial banks only
B. Commercial banks and NBFCs only
C. Commercial banks, NBFCs, AIFIs, ARCs and CICs
D. All banks including Payments Banks
Answer: C
Explanation: The directions are applicable to Commercial Banks (excluding SFBs, LABs, PBs and RRBs), NBFCs, AIFIs (EXIM Bank, NABARD), Asset Reconstruction Companies and Credit Information Companies.
Disclaimer: This article is for educational purposes only. Always refer to the official RBI website at www.rbi.org.in for the most current guidelines and directions.