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This piece has been authored by Mr. Advaith Govind, a student of LL.M (Corporate and Commercial Law) at the Maharashtra National Law University, Mumbai.


The incidence of ‘willful default’ and ‘willful defaulters’ have amassed critical attention in the wake of several economic frauds that has taken place, and the recent disclosure by the Reserve Bank of India[i] of the list of 30 major willful defaulters in lieu of an RTI being filed in May 2019.[ii] According to Transunion Cibil Data, willful defaults have accumulated over Rs 1.61 lakh crore by December, 2018.[iii]

What is Willful Default?

A ‘default’ is said to occur when a debtor fails to repay a debt, including the interest or the principal on a loan or security. It could either be the inability to make timely payments or voluntarily not paying the same.[iv] Hence, it is primarily premised upon the repaying obligations of the borrower. A default could occur on a secured debt such as a mortgage secured by an asset.

Willful default occurs when a debtor willfully defaults the repayment of a loan. ‘Willful defaulter’, according to Master Circular of July 1, 2015 (2015 circular)[v] issued by Reserve Bank of India (RBI), is any unit which has defaulted in repaying the lender:[vi]

· even when it had the capacity to repay;

· which has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes;

· which has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets;

· which has disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.

Thus, the ‘Circular creates a deeming fiction under which a willful default would be deemed to have occurred if any one of the four events listed therein had taken place’.[vii] A ‘unit’ can be any individual, juristic persons or other forms of business enterprises, whether incorporated or not.[viii]

The RBI vide the 2015 circular consolidated the instructions and guidelines issued to banks and financial institutions with regards to willful defaults and defaulters, which was rather an add-on from the July 1, 2013 Master Circular. The Circular intends to “disseminate credit information pertaining to willful defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them.”[ix]

The case of willful default was first taken up by the RBI vide a circular dated February 20, 1999, which was issued for the collection and dissemination of Information on cases of willful default of Rs.25 lakhs and above.[x] This was done pursuant to instructions of Central Vigilance Commission for the collection of details of willful defaults of Rs.25 lakhs and above, by RBI. The intent of the circular was to formulate a scheme where in all instances of willful default detected after 31st March 1999 were to be reported on a quarterly basis by banks and financial institutions (FIs).

There have been several instances where the authority of the RBI to issue circulars has been challenged. In the case of Ionic Metalliks and others v. Union of India,[xi] the capacity of the RBI to issue circulars vis-à-vis willful defaulters was challenged. In this case, the master circulars dated 1.7.2011 and 2.7.2012 issued by the Reserve Bank were contested to be beyond the legislative competence of the RBI. However, a division bench of the Gujarat High Court discarded the contention stating that the RBI had an underlying public interest and was acting well within its legislative competence assigned by provisions of Reserve Bank of India Act, 1934[xii], and Banking Regulations Act, 1949.[xiii]

Recently, a division bench of the Supreme Court in the case of SBI v. Jah Developers (P) Ltd.[xiv] considered the constitutionality of the 2015 Master Circular and reiterated that it should be construed reasonably as it caters to serve the public interest and is not in contravention to Article 19(1)(g) of the Indian Constitution.

Siphoning and Diversion of Funds

A willful defaulter is identified pursuant to any diversion or siphoning of funds transferred by the lender bank or financial institution to the borrower. Clause 2.2 of the 2015 circular elaborates upon Diversion and Siphoning of funds.[xv] The clause caters to the aberration in the usage of the funds transferred by the creditor bank to the transferee. It is concerned with the compliance to the terms of the sanction that subsist vis-à-vis the transfer of funds.

Diversion of funds means any use of the funds other than the purpose for which it was originally sanctioned by the creditor; when funds are used in abrogation to the terms and conditions of the transfer. Clause 2.2.1 lists down the same as:[xvi]

(a) utilizing short-term working capital funds for long-term purposes not in conformity with the terms of sanction;

(b) deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned;

(c) transferring borrowed funds to the subsidiaries / group companies or other corporates 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) investing in other companies by way of acquiring equities / debt instruments without approval of lenders; and

(f) shortfall in deployment of funds vis-à-vis the amounts disbursed and the difference not being accounted for.

Siphoning of funds on the other hand means utilizing the funds for purposes unrelated the borrower’s operations so as to be detrimental to the financial health of the borrower or the lender.[xvii]

Clause 2.4 of the master circular[xviii] seeks to ensure proper end-use of funds by the lender banks or the financial institution. It provides several cautious measures that should be considered before handing out loans. Due diligence at the part of the lender, integrity and reliability of the borrower, and certification from chartered accountant are the some of the ways to ensure due end-use of funds. In addition to this, the circular urges the lender to entail into a periodical scrutiny of the borrower’s businesses. At large, there is hardly any hard and fast rules to identify any discrepancies in the funds transferred.

Penal Measures

The 2015 circular facilitates certain penal measure to be initiated by the lender banks and institutions in the event of any willful default.[xix] According to this section, no additional facilities are to be granted by any bank / FI to the listed willful defaulters. Lender could initiate criminal proceedings against such defaulter and they could be debarred from floating any new ventures for a period of 5 years from the date of removal of their name from the list of willful defaulters as published/disseminated by RBI/Credit Information Companies (CIC).[xx]

Sub clause d of Clause 2.5 indicates towards a proactive involvement of creditors in the management of the willful defaulter company. This could be done in consonance with the new Insolvency and Bankruptcy Code, 2016 which allows secured creditors such as banks and financial institutions to move for a Corporate Insolvency Resolution Process and take on the eventual management of the company for the its best interest.

Identification of Willful Defaulters

The RBI has prescribed several steps for the identification of willful defaulters:

· There shall be an examination by a preliminary committee called the ‘Identification Committee’ headed by an Executive Director and consisting of two other officers in the rank of General Manager or Deputy General Manager, in the event of any evidence as to any willful default at the part of any borrower.

· Consequently, a show cause notice shall be served to the borrower by the in the event of them finding a willful default at his part. In case of a company being in default, the promoter or the whole-time directors shall be ask asked to give their submission on the same and based on the same the committee shall issue an order of willful default. Opportunity of hearing shall be granted to the borrowers depending on the discretion of the Committee.

· The decision and order of the Identification Committee shall be reviewed by a ‘Review Committee’, headed by the Chairman (or the Managing Director or the Chief Executive Officer) and two Independent Directors (or Non-Executive Directors) of the bank. Only upon the assent of the Review Committee that an order of the Identification shall become final.

In the case of Orchid Chemicals and Pharmaceuticals Limited v RBI,[xxi] the Madras High Court opined that it is upon the bank or the financial institution and not the court to determine whether someone is a willful defaulter or not.

The Need for a Consolidated Legislation

While the instance of several big companies turning willful defaulters can irrevocably harm the economy and cause a major downturn in the long run, it is high time that the Government clip their wings.

Currently, the instance of willful defaults exists only within the sphere of the various circulars and master circulars issued by the RBI and there are several stumbling blocks in their applicability. Further, cases of willful defaults are mired in lengthy disputes and adjudications. In order to clamp down the cases of willful default, there has to be some serious legislative interference by the Government. With recent legislations like the Fugitive Economic Offenders Act, 2018, Banking Regulation Amendment Act, 2017, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, and the Insolvency and Bankruptcy Code, 2016, the current state of affairs shall ameliorate, but only with due and timely interference in case of defaults, shall it facilitate adequate and sufficient results.

The government has to formulate an exclusive act addressing the case of wilful default and how it could be curbed, rather than allowing it to be vaguely scattered across several legislations.


[i] Kabir Agarwal & Anuj Srivas, Under RTI Act, RBI Finally Discloses Details of Major Wilful Defaulters, The Wire (Dec. 12, 2019, 8:30 PM),

[ii] Id.

[iii] George Mathew, Wilful defaults surge by Rs 121,700 crore in 5 years, The Indian Express (Dec. 12, 2019, 7:05PM),

[iv] What Is Default?, Investopedia (Dec. 14, 2019, 10:07 AM),

[v] Master Circular on Wilful Defaulters, Reserve Bank Of India (Dec 8, 2019, 2:20PM), (hereinafter “Master Circular”)

[vi] Supra note 6, cl. 2.1.

[vii] Orchid Chemicals and Pharmaceuticals Limited v. RBI, 2014 SCC OnLine Mad 10541.

[viii] Supra note 6.

[ix] Id.

[x] Wilful Defaulters and action there against, Reserve Bank Of India (Dec 8, 2019, 2:27PM),

[xi] Ionic Metalliks and others v. Union of India, (2014) SCC OnLine Guj.

[xii] Reserve Bank of India Act, 1934, §35A.

[xiii] Banking Regulations Act, 1949, § 21.

[xiv] State Bank of India v. Jah Developers Private Limited and Others, (2019) 6 SCC 787.

[xv] Master Circular, supra note 6, cl. 2.2.

[xvi] Id., cl. 2.2.1.

[xvii] Id., cl. 2.2.2,.

[xviii] Id., cl. 2.4.

[xix] Id., cl. 2.5.

[xx] Id., cl. 2.5(b).

[xxi] Orchid Chemicals, supra note 8.


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