Resolution of Stressed Assets and Wilful Defaulters in Indian Banking

The hardest question in bad debt is not how to recover, but when to admit that recovery is in doubt. India spent a decade building and dismantling schemes that let banks restructure a loan without recognising the loss, until the Reserve Bank swept them all away in 2018, the Supreme Court struck that attempt down in 2019, and a new framework was issued within weeks. This note sets out the framework now in force, and the separate regime for the borrower who could have paid and did not.

Figure 1: A decade of restructuring frameworks

1. How the Framework Came About

• The schemes: between 2014 and 2018 the Reserve Bank introduced a succession of mechanisms for restructuring stressed debt, including the joint lenders' forum, strategic debt restructuring, the scheme for sustainable structuring of stressed assets and the flexible structuring of long term project loans.
• The criticism: each permitted a measure of forbearance, and in practice they were used to postpone recognition rather than to resolve. The asset quality review of 2015 established how much had been concealed.
• The circular of 12 February 2018: the Reserve Bank withdrew every earlier scheme and substituted a single rule: on one day's default, lenders must begin resolution, and if no plan was implemented within one hundred and eighty days, the account had to be referred under the Insolvency and Bankruptcy Code.
• Dharani Sugars and Chemicals Ltd. v. Union of India, (2019) 5 SCC 480: the Supreme Court held the circular ultra vires. The Reserve Bank's power to direct a reference to insolvency under Section 35AA of the Banking Regulation Act could be exercised only in respect of a specific default by a specific debtor, on the authorisation of the Central Government, and not by a general direction covering all defaulters.
• The present framework: the Prudential Framework for Resolution of Stressed Assets, issued on 7 June 2019, which retains the discipline of the 2018 circular while removing the mandatory reference to insolvency that the Court had found objectionable. In the Reserve Bank's consolidation of 28 November 2025, its provisions for commercial banks were carried into the Reserve Bank of India (Commercial Banks: Resolution of Stressed Assets) Directions, 2025.

2. The Prudential Framework

Figure 2: The steps after a default

• Early recognition: lenders must recognise incipient stress immediately on default and classify the account as a special mention account.
• The review period: on default by a borrower with an aggregate exposure above the prescribed threshold, lenders must undertake a review of the account within thirty days from the date of default and decide on a resolution strategy, including the nature of the plan and the approach to implementation.
• The inter-creditor agreement: where a resolution plan is to be implemented, all lenders must enter into an inter-creditor agreement during the review period, providing the ground rules. A decision agreed by lenders representing seventy five per cent by value of the total outstanding credit facilities and sixty per cent by number is binding on all the lenders.
• Dissenting lenders: the agreement must provide that a dissenting lender has the option to exit by selling its exposure, or to be paid an amount not less than the liquidation value due to it.
• Implementation: the resolution plan must be implemented within one hundred and eighty days from the end of the review period. A plan without restructuring is treated as implemented only if the borrower is not in default with any lender on the one hundred and eightieth day. A plan involving restructuring or a change in ownership is implemented only when the documentation is executed, the security is perfected, and the new capital structure is reflected in the books of all lenders and the borrower.
• Independent credit evaluation: for larger exposures, the residual debt under the plan must be rated by credit rating agencies specifically authorised by the Reserve Bank, and a specified minimum rating must be obtained, with two ratings required above a higher threshold. The evaluation is required for restructuring or a change in ownership where the aggregate exposure is ₹100 crore or more, and two evaluations at ₹500 crore or more.

The cost of delay

• Twenty per cent: where a plan is not implemented within one hundred and eighty days from the end of the review period, lenders must make an additional provision of twenty per cent of the outstanding, over and above the ordinary requirement.
• Thirty five per cent: where the plan is not implemented within three hundred and sixty five days from the commencement of the review period, the additional provision rises to thirty five per cent in total.
• Reversal: half of the additional provision may be reversed on the filing of an insolvency application, and the remainder on admission of the borrower into the insolvency process, which is how the framework preserves an incentive to use the Code without making reference compulsory.
• Why a provision rather than a command: after Dharani Sugars the Reserve Bank cannot require every defaulter to be taken to insolvency. It can, however, make delay expensive, which leaves the decision with the lenders while pricing the forbearance.
• Thresholds: the framework applied immediately to borrowers with an aggregate exposure of ₹2,000 crore and above from 7 June 2019, and to those between ₹1,500 crore and ₹2,000 crore from 1 January 2020, with the reference date for smaller exposures to be announced.

3. Wilful Defaulters

• The instrument: the Master Direction on Treatment of Wilful Defaulters and Large Defaulters, 2024, issued on 30 July 2024 and effective from 28 October 2024, which replaced the earlier master circular.
• The definition: a wilful default occurs where a borrower defaults in meeting payment or repayment obligations and at least one of the following is present: the borrower has the capacity to honour the obligation and has not done so; the funds have been diverted, that is used for purposes other than those for which the facility was availed; the funds have been siphoned off, that is taken out of the unit and not used for it or for the lender's benefit; the borrower has disposed of securities given for the facility without the lender's approval; or the promoter has failed to infuse equity despite having the ability to do so, where the lender relied on that commitment.
• Deliberate, not accidental: the default must be intentional, deliberate and calculated. A declaration may not rest on an isolated transaction or on business failure alone, which is the central safeguard for the borrower.
• The threshold: accounts with an outstanding amount of ₹25 lakh and above must be examined for evidence of wilful default.
• Timeline: where preliminary screening discloses evidence, the classification must be completed within six months of the account being classified as a non-performing asset.
• The process: an Identification Committee issues a show cause notice with the material relied on; the borrower has 21 days to reply; the Committee, if satisfied, makes a proposal with written reasons to a Review Committee, before which the borrower has a further opportunity to make a written representation and to be heard in person. The Review Committee passes a reasoned final order. Lawyers are not permitted to represent the borrower before these committees.
• Large defaulter: a borrower with an outstanding amount of ₹1 crore and above, including unapplied interest, whose account is suit filed or classified as doubtful or loss. The category exists for reporting to credit information companies, and is distinct from wilful default, which requires culpability.

Consequences of being listed

• No further credit: no additional credit facility to the wilful defaulter or to any entity with which it is associated, and no credit for one year after removal from the list.
• No new ventures: a bar on credit for floating a new venture for five years after removal from the list.
• No restructuring: a wilful defaulter and its associated entities are ineligible for restructuring until one year after removal from the list.
• Governance: credit agreements must provide that a person listed as a wilful defaulter shall not be on the board or in the management of the borrower, and no facility may be renewed, enhanced or restructured while such a person remains there.
• Reporting and publicity: lenders report the list to credit information companies monthly, and may publish photographs of wilful defaulters under a board approved policy.
• Criminal proceedings: nothing in the process prevents a lender from initiating criminal proceedings, which continue even if the name is later removed from the list.
• Judicial review: a declaration carries serious civil consequences and must therefore satisfy the requirements of natural justice, which is why the Direction prescribes the notice, the reply, the personal hearing and the reasoned order in such detail.

4. Questions Arising

Why did the Supreme Court strike down the circular of 12 February 2018?

Because of the source of the power. Section 35AA of the Banking Regulation Act permits the Central Government to authorise the Reserve Bank to issue directions to initiate insolvency proceedings in respect of a default, and the Court read that as meaning a specific default by a specific debtor, authorised by the Government in that instance. A circular requiring every defaulter above a threshold to be referred was a general direction unsupported by the section, and therefore ultra vires. The holding was about how the Reserve Bank may act, not about whether insolvency is a proper remedy.

Is a wilful defaulter the same as a fraud?

No, and the distinction matters. Wilful default concerns non-payment despite capacity, or the diversion or siphoning of funds, and leads to credit consequences under a Reserve Bank Direction. Fraud is classified under a separate framework, carries reporting obligations to the Reserve Bank and to the investigating agencies, and has criminal consequences. The two may overlap on the same facts, but a borrower may be a wilful defaulter without any fraud having been committed, and the two determinations are made by different processes.

5. Quick Revision

6. Frequently Asked Questions

What is the Prudential Framework for Resolution of Stressed Assets?

The Reserve Bank's framework of 7 June 2019, which requires lenders to recognise stress on default, to review the account within thirty days, to enter into an inter-creditor agreement, and to implement a resolution plan within one hundred and eighty days of the end of the review period, failing which additional provisions of twenty and then thirty five per cent apply. It replaced the circular of 12 February 2018 after that was struck down.

What did Dharani Sugars decide?

That the Reserve Bank's circular of 12 February 2018 was ultra vires. Section 35AA of the Banking Regulation Act permits the Central Government to authorise the Reserve Bank to direct the initiation of insolvency proceedings in respect of a default, which the Court read as a specific default by a specific debtor. A general direction requiring every defaulter above a threshold to be referred was outside that power.

What majority is needed under an inter-creditor agreement?

A decision agreed by lenders representing seventy five per cent by value of the total outstanding credit facilities and sixty per cent by number is binding on all lenders. A dissenting lender must be given the option to exit by selling its exposure, or to be paid an amount not less than the liquidation value due to it.

What is a wilful defaulter?

A borrower who has defaulted and in whose case at least one of the following is present: capacity to honour the obligation without doing so; diversion of funds to other purposes; siphoning of funds out of the unit; disposal of securities without the lender's approval; or a promoter's failure to infuse equity despite the ability, where the lender relied on that commitment. The default must be intentional, deliberate and calculated.

What are the consequences of being declared a wilful defaulter?

No additional credit to the defaulter or associated entities, and none for one year after removal from the list; no credit for a new venture for five years after removal; ineligibility for restructuring until one year after removal; a bar on the listed person being on the board or in the management of a borrower; monthly reporting to credit information companies; possible publication of photographs; and the possibility of criminal proceedings, which survive removal from the list.

7. Related Topics and Provisions

• Non-performing assets: classification and provisioning
• Recovery of Debts and Bankruptcy Act, 1993
• The SARFAESI Act and enforcement of security interest
• The Insolvency and Bankruptcy Code, 2016 and banks
• Inspection, directions and penalties