If we say, money is something really very important to us after food, shelter, and clothes. Then, this is not true. We need money even to buy food, shelter and clothing. Sometimes we even need to borrow money to meet out these needs and others. There are a lot of persons and entities who borrow funds from banks and Non-Banking Financial Companies (NBFCs) when required. Someone may borrow to start a greenfield project or may borrow for the expansion of an already running business. Then some money is earned out and paid back to the lending institution. Here comes the terms defaulter and wilful defaulter.

Wilful defaulter

Who is Wilful Defaulter?

Any person or entity which defaults on its payments for the loans or credit taken by it from any financial institution is a defaulter. But it will not be wise to say that every defaulter is a wilful defaulter. To be specific, a wilful defaulter is a person or entity who or which doesn’t repay his loan or liability while having the financial capacity to repay it. The concerned person or entity intentionally defaults on payments in case of wilful default.

It cannot be applied everywhere, but there is a proverb “a person who is fast to borrow money is slow to pay back”. That’s why the lending institutions take so much caution while forwarding loans. Indeed, it can’t be a hasty process.

Let’s get back to the wilful defaulter otherwise, he will either run away or will default on his payments. According to Reserve Bank of India, a wilful defaulter is one who 

  1. is financially capable to repay the loan but yet no doing so.

  2. or one who diverts the funds for the purpose other than for which funds were availed e.g. If I take a loan from a bank to start a new school and I open a beer bar with it.

  3. or with whom funds are not available in the form of assets, as the funds have been syphoned off.

  4. or one who has sold off or disposed of the property which was used as collateral while taking credit or loan from a lending institution.

However, a lending institution cannot declare an entity or individual as a wilful defaulter for just a single default on repayments. It needs to take into account the repayment track record of that person or entity i.e. whether defaulting on payments by the concerned person or entity is right from the beginning or just now due to some structural financial problems. 

Before declaring a person or entity as wilful defaulter, he should be informed about the same and should be given a chance to clarify his stand. Also, the default amount needs to be at least 25 lakh rupees to include a person in the category of the willful defaulter.

What if a person or entity is declared wilful defaulter?

There are certain restrictions applies in this scenario, which is given below:

  • He is barred from participating in the capital market to issue shares and raise funds.

  • Also barred from availing any banking facilities and access to financial institutions to start a new venture for a period of five years.

  • The process of recovery can be initiated against the concerned person or entity with full vigour. Even criminal proceedings can be initiated if required.

  • The lending institution may not allow any person related to the defaulting entity to become a board member of any other company as well.

What Raghuram Rajan said on wilful defaulter?

“The wilful defaulter tag is a powerful weapon in the hands of creditors for resolving distressed assets. It shuts out access to credit within the Indian financial system for a borrower.”

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