Wilful Defaulter Declarations: Procedure and Defence

A wilful defaulter declaration is not a finding that a borrower failed to repay. It is a finding that the borrower failed to repay deliberately — despite capacity, or after diverting, siphoning or disposing of the money or the security. Because the declaration carries severe civil consequences and is made by the lender itself rather than by a court, the RBI framework surrounds it with procedural safeguards, and a challenge to a declaration usually turns on the breach of those safeguards rather than on the merits.

This note sets out the current framework, the two-committee procedure a lender must follow, what the declaration actually does to a borrower, and the grounds on which such declarations are challenged before the High Court.

Which RBI framework currently governs wilful default?

Since 28 November 2025 the framework is entity-wise. In the Reserve Bank's consolidation of its regulatory instructions on that date, the wilful defaulter rules were reissued as separate directions for each category of lender:

• For commercial banks: the Reserve Bank of India (Commercial Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025 (RBI/DOR/2025-26/166, dated 28 November 2025).
• For non-banking financial companies: the Reserve Bank of India (Non-Banking Financial Companies – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025 (RBI/DOR/2025-26/358, of the same date), which apply to NBFCs in the Middle Layer and above.
• Parallel directions of the same date govern the other categories of regulated lender.

Paragraph references in this note are to the commercial bank directions; the corresponding provisions for other lenders are in their own directions. Each set repeals the earlier instructions for its category (paragraph 22 of the commercial bank directions) and provides that action already taken under the repealed instructions continues to be governed by them. A show cause notice issued, or a declaration made, before 28 November 2025 is therefore tested against the instrument under which it was issued.

The earlier instruments

Before the consolidation, the field was governed by the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, issued on 30 July 2024 and in force ninety days after they were placed on the Reserve Bank's website. Those Directions replaced the Master Circular on Wilful Defaulters of 1 July 2015, applied one framework to banks, all-India financial institutions and NBFCs in the Middle Layer and above, and set out the two-committee procedure around a board-approved policy, a show cause notice and a reasoned order. The 2025 directions retain that structure; the principal change is that each category of lender now has its own instrument. The 2015 Master Circular and the 2024 Directions remain relevant only to declarations made while they were in force.

Thresholds

The wilful default examination applies to non-performing accounts with an outstanding of ₹25 lakh and above (paragraph 6(1)). A separate category, the large defaulter, covers accounts with an outstanding of ₹1 crore or more where a suit has been filed or the account is classified as doubtful or loss (paragraph 3(1)(xi)). That category exists for credit-information reporting rather than for the disabilities that follow a wilful default finding.

What must a lender establish beyond default?

Paragraph 3(1)(xviii)(A) treats a wilful default by a borrower as occurring where the borrower has defaulted in meeting its payment or repayment obligations and at least one of the specified features is present:

The word doing the work in every feature is and. Default is the entry condition, not the finding. A lender that establishes only the default, and nothing beyond it, has not established wilful default — and an order that simply recites the outstanding amount and concludes that the default is wilful is vulnerable for exactly that reason. Paragraph 5(1) adds that the identification should rest on the borrower's track record, not on isolated transactions or incidents, and paragraph 5(2) requires the default to be intentional, deliberate and calculated.

How are diversion and siphoning distinguished?

The two are frequently pleaded together and are defined separately — diversion in paragraph 3(1)(vii) and siphoning in paragraph 3(1)(xvi).

Diversion is about the purpose the funds were put to within the borrower's own affairs. The listed instances are using short-term working capital for long-term purposes contrary to the terms of sanction, creating assets other than those for which the credit was sanctioned, transferring funds to subsidiaries, group companies or other entities without the lenders' approval, routing funds through a lender outside the consortium without prior written permission, investing the funds in equity or debt of other entities without approval, and a shortfall between the amounts drawn and the amounts deployed which is not accounted for.

Siphoning is narrower and more serious: the funds were used for purposes unrelated to the operations of the borrower. Establishing siphoning ordinarily requires the lender to trace the money, not merely to point to a gap in the books.

The practical significance is evidentiary. Diversion can often be answered from the borrower's own records — sanction terms, end-use certificates, audited statements, board resolutions. Siphoning is an allegation of extraction and, if the lender's material does not trace the funds out of the business, it is an allegation that has not been made out.

Who can be named besides the borrower entity?

The unit of classification is not only the corporate borrower. Under paragraph 3(1)(xix), where the borrower is a company the classification extends to its promoters and directors, subject to the protection for non-whole-time directors.

Promoters and directors come within the classification of a corporate wilful defaulter, but "director" is defined narrowly: a director who was associated with the company at the time when the acts of omission or commission that led to the default took place (paragraph 3(1)(v)). Each person proposed to be classified must be served with the show cause notice (paragraph 5(4)), so the case against each has to be put to that person. Where the borrower is not a company, the classification extends to the persons in charge of and responsible for the management of its affairs.

Non-whole-time directors, including independent and nominee directors, are on a different footing. Paragraph 5(14) provides that such a director is not to be treated as a wilful defaulter unless it is conclusively established that the wilful default occurred with that person's consent or connivance, or that the person was aware of it from the proceedings of the board or a committee and did not record an objection. A declaration against an independent director supported only by the fact of board membership is one of the more readily challenged categories of order.

Guarantors may be classified under paragraph 3(1)(xviii)(B) where the guarantee has been invoked and the guarantor, having sufficient means to pay, does not honour it, or where the guarantor has disposed of assets given as security without the lender's approval or failed to infuse committed equity despite the ability to do so. Paragraph 10(4) applies the same identification procedure to guarantors. For the non-honour limb, the precondition is invocation: a guarantor against whom the guarantee was never invoked has not refused anything, and a classification on that limb lacks its factual foundation.

What is the two-committee procedure a lender must follow?

The directions route the decision through two committees, deliberately separating the authority that proposes from the authority that decides. The exercise runs in five steps.

Step 1 — Examination of the account

The lender must examine the aspect of wilful default in every non-performing account of ₹25 lakh and above (paragraph 6(1)) and complete the classification within six months of the account being classified as a non-performing asset (paragraph 6(2)). Accounts not flagged at the first examination are re-examined at a periodicity fixed by the lender's board (paragraph 6(3)). The examination is conducted against the lender's board-approved policy and is expected to be evidence-led: statements of account, sanction and disbursement records, end-use verification, stock and book-debt statements, inspection reports and, in larger accounts, a forensic audit.

Step 2 — The Identification Committee and the show cause notice

An Identification Committee examines the evidence (paragraph 5(3)). For a commercial bank other than a foreign bank it is chaired by a whole-time director other than the managing director and chief executive officer, with two senior officials as members; for credit facilities below a threshold fixed by its board, a bank may constitute it with an officer just below whole-time director rank as chair (paragraph 3(1)(ix)). If it is satisfied that an event of wilful default has occurred, it must issue a show cause notice to the borrower and to every other person proposed to be classified — promoter, director, guarantor, or person in charge — and call for written submissions within 21 days of the notice. The bank must also disclose to them all the material and information on which the notice is based (paragraph 5(4)).

The notice is not a formality. A notice that recites the definition in the abstract, without telling the borrower which acts are said to constitute diversion or siphoning, and without the material relied upon, does not permit a meaningful reply.

Step 3 — The Identification Committee's reasoned proposal

After considering the submissions, if the Committee is still of the view that wilful default is made out, it records its reasons in writing and makes a proposal to the Review Committee (paragraph 5(5)). The borrower and the others named must then be advised of the proposal along with the reasons for it (paragraph 5(6)), and may make a written representation to the Review Committee within 15 days of the proposal (paragraph 5(7)). The borrower cannot make an effective representation to the reviewing authority without knowing what the proposing authority concluded and why.

Step 4 — Representation and personal hearing before the Review Committee

The Review Committee of a commercial bank other than a foreign bank is chaired by the managing director and chief executive officer, with two independent or non-executive directors (a lower-ranked committee is permitted for facilities below a board-set threshold), and its members must not be members of the Identification Committee (paragraph 3(1)(xv)). The Review Committee must offer the borrower an opportunity of personal hearing; if the opportunity is not availed of, it decides on the record (paragraph 5(9)).

The proceeding is an in-house one, and paragraph 5(10) provides that the borrower has no right to be represented by a lawyer at it. That limitation is balanced by what the borrower is entitled to instead: the proposal and its reasons, a genuine opportunity to represent against it, and a reasoned order dealing with that representation. The opportunity must be offered; a borrower who has been properly offered a hearing and does not take it cannot later complain that none was held.

Step 5 — The reasoned final order

Classification takes effect only on the Review Committee's order. Paragraph 5(11) requires a reasoned order, communicated to the person classified; paragraphs 5(12) and 5(13) require the notice and the order to be served by a designated official and to state that they have the committee's approval and identify its members. To be reasoned, the order should engage with the borrower's submissions, record a finding on the specific feature relied upon and, where non-payment despite capacity is alleged, record a finding on capacity to pay. The name is then reported to the credit information companies in the monthly list of wilful defaulters (paragraph 12(1)).

What happens once the declaration is made?

The consequences are cumulative and outlast the loan.

A change of ownership through a resolution plan under the IBC, or under the RBI's resolution framework, ordinarily ends the penal measures for the borrower entity itself, but the one-year and five-year bars continue against its erstwhile promoters, directors and guarantors (paragraph 15).

The IBC consequence is the one promoters underestimate. Section 29A(b) does not merely restrict borrowing; it excludes the promoter from bidding for the company's own assets in its resolution process, and the connected exposure of personal guarantors to corporate debtors has to be assessed alongside it.

Because the disabilities attach to the person and not merely to the account, settling the loan does not undo the history. Ordinarily the lender must inform the credit information companies of the removal within thirty days of the outstanding falling below ₹25 lakh (paragraph 12(2)), but removal after a compromise requires payment of the compromise amount in full (paragraph 13(1)); a partial payment leaves the name on the list even if the balance falls below the threshold (paragraph 13(2)). That asymmetry is why the classification stage is usually worth contesting properly rather than deferring to the recovery negotiation.

On what grounds are declarations set aside?

The classification is made by the creditor, in its own cause, with civil consequences of a quasi-penal character. A writ court does not sit in appeal on the lender's commercial appreciation of the evidence. It does scrutinise the process closely. The grounds on which declarations are challenged include these.

No show cause notice, or a notice without particulars. A notice that does not identify the transactions relied upon, or the feature invoked, forecloses a meaningful reply.

Non-supply of the material relied upon. Where a forensic audit report or investigation report is the basis of the allegation, withholding it while relying on it is a denial of hearing. Paragraph 5(4) puts the point beyond argument: the bank must disclose all the material and information on which the show cause notice is based. The borrower must be furnished with that material and heard before the adverse finding is recorded.

The Identification Committee's proposal was never communicated. Paragraph 5(6) requires the proposal and its reasons to be communicated. Without them, the representation to the Review Committee under paragraph 5(7) is made in the dark.

No opportunity of personal hearing before the Review Committee, or a hearing offered on notice so short that it was illusory.

A non-speaking order. An order that records the conclusion without engaging with the reply is vulnerable to being set aside, ordinarily with liberty to the lender to redo the exercise.

Overlap between the two committees. Paragraph 3(1)(xv) bars members of the Identification Committee from the Review Committee. Where the same officer sits on, or effectively controls, both bodies, the two-stage structure collapses and the safeguard is defeated.

No finding on capacity to pay. Where the case is non-payment despite capacity, the absence of any finding that the borrower could have paid is a failure to make out the feature at all.

Personal classification without personal material. Naming a non-whole-time director without the material paragraph 5(14) requires, naming a director who was not associated with the company when the acts leading to the default occurred, or classifying a guarantor for non-honour of a guarantee that was never invoked.

Classification after settlement, or on a stale record. Where dues were settled, or the account's status changed materially, before the order was passed.

Two cautions are worth stating plainly. Success on these grounds ordinarily produces a quashing with liberty to the lender to proceed afresh from the defective stage — it is a procedural reset, not an acquittal on the merits. And the writ court will not re-appreciate whether funds were in fact diverted; that is the lender's call on the evidence, subject to perversity.

Where and how is the challenge brought?

There is no statutory appeal against a wilful defaulter declaration. The remedy is a writ petition under Article 226 before the High Court having territorial jurisdiction over the lender's decision-making office or the cause of action.

Maintainability against a private-sector lender has to be pleaded rather than assumed. A private bank or NBFC is ordinarily not "State" under Article 12, and writ jurisdiction does not run against the purely commercial or contractual side of its business. A wilful defaulter classification is not a contractual act: the power is exercised under statutory directions issued by the RBI and produces disabilities imposed by law. That public element is what sustains the writ, so the statutory source of the power should be set out on the face of the petition.

Three practical points shape the petition:

1. Move promptly. There is no limitation period, but the declaration is published and acted upon by third parties. Delay both weakens the equities and multiplies the consequential damage that has to be undone.

2. Plead the process, then the merits. The strongest petitions annex the sanction letters, the show cause notice, the reply, the Identification Committee's proposal and the Review Committee's order, and demonstrate the gap on the face of the record.

3. Seek interim protection specifically. Interim relief usually needs to be framed as a stay on the operation of the declaration and on its reporting or continued dissemination to the credit information companies, not merely a stay of "further proceedings".

A checklist for a borrower served with a show cause notice

• Diarise the reply date — 21 days from the notice — and confirm who else in the group or on the board has been served.
• Identify which feature of the definition is invoked, and against which specific transactions.
• Demand, in writing, copies of every document relied upon — forensic audit report, inspection reports, end-use verification, the statement of account.
• Reconstruct end-use from primary records: sanction terms, disbursement advices, purchase and payment records, audited financials.
• Address capacity to pay directly, with contemporaneous evidence of the borrower's financial position on the relevant dates, wherever non-payment despite capacity is alleged.
• For related-party transfers, produce the commercial rationale, the board approval, and any lender consent on record.
• For alleged disposal of security, produce the lender's approval, or show that the asset was outside the security.
• If an individual is named, deal separately with that person's role, designation and actual involvement.
• Diarise the 15-day window for a representation once the Identification Committee's proposal is received, and ask expressly for a personal hearing before the Review Committee.
• Preserve the record of service — dates, modes, and what was and was not enclosed.

How lenders reduce the risk of their own orders being quashed

For banks, NBFCs and ARCs, the discipline is symmetrical. Orders survive scrutiny when the show cause notice is transaction-specific rather than definitional; when the material relied upon is supplied with the notice; when the Identification Committee's reasons are communicated before the representation stage; when the Review Committee is genuinely differently constituted; and when the final order records a finding on each feature invoked and on capacity to pay. Institutions that build this discipline into their board-approved policy leave fewer openings when a classification is tested. The same file discipline supports parallel debt recovery action and any subsequent proceeding, and it is one of the points examined when institutions appoint panel counsel for recovery work.

How this sits alongside fraud classification, SARFAESI, DRT and IBC

A wilful defaulter declaration is not a recovery mechanism. It does not realise a rupee. It is a regulatory disability that runs in parallel with the recovery machinery — SARFAESI enforcement against the security, an application before the Debts Recovery Tribunal for the balance and against guarantors, and, where the borrower is a corporate debtor, proceedings under the Insolvency and Bankruptcy Code. It also runs separately from a fraud classification of the account, which since 31 July 2026 is governed by the entity-wise Fraud Risk Management Directions, 2026 — for commercial banks, the Reserve Bank of India (Commercial Banks – Fraud Risk Management) Directions, 2026 (RBI/DoS/2026-27/412), which repealed the 2024 Master Directions on Fraud Risk Management for that category.

The sequencing matters. A classification made while a resolution process is live can determine whether the promoter is shut out under Section 29A. A classification made while a Section 17 challenge to SARFAESI enforcement is pending before the DRT can affect the borrower's ability to fund a settlement. Borrowers and lenders both tend to treat the classification as an administrative side-issue to the recovery; it is usually the item with the longest tail. Definitions of the recurring terms used here are collected in the legal glossary, and the broader framework is set out under NPA resolution.

This article is general information on the law and procedure, and not legal advice; the outcome in any matter turns on its own record. For queries relating to a specific wilful defaulter notice or declaration, the chambers can be reached through the contact page.