Current · Source: Reserve Bank of India · RBI/2007-08/377 · issued 24 Jun 2008 · ~2 min read
Quick answerRBI has expanded the wilful defaulter definition for urban co-operative banks to include borrowers who sell or remove collateral assets without the bank's knowledge. This adds a fourth condition to the existing three-part definition, effective immediately.
The rule, in the simplest words
If you borrow money from a bank and secretly sell or remove the things you gave as a promise (like a building or a machine) without telling the bank, you can be called a 'wilful defaulter' (someone who chooses not to pay back).
Banks cannot give any new loans to people already listed as 'wilful defaulters'.
If a company's owners are caught stealing or lying about money, they cannot get new loans from any bank for 5 years after their name is published in the RBI's list.
How it plays out — a real example
Ravi, a co-operative bank branch officer in Indore, reviews a borrower's file and notices the borrower sold the factory machinery given as collateral without informing the bank. Ravi now classifies the borrower as a wilful defaulter under the new rule, stops any new loan requests, and reports the promoter to the RBI list so they cannot borrow from any bank for five years.
What changed
RBI added a new clause (d) to the wilful defaulter definition for scheduled urban co-operative banks. The new clause covers cases where a borrower defaults on repayment and also disposes of or removes movable fixed assets or immovable property given as security for a term loan without the bank's knowledge. This expands the earlier three-part definition from the August 2002 circular.
What it means for you
UCBs now have a clearer basis to classify borrowers as wilful defaulters when they secretly sell or remove collateral. This strengthens lenders' ability to take action against asset stripping. Additionally, the circular reiterates that no fresh credit should be extended to listed wilful defaulters, and promoters involved in fund diversion or fraud are barred from new institutional finance for five years.
What you must do
Update your internal wilful defaulter identification policy to include the new clause (d) on unauthorized disposal of collateral.
Review existing loan accounts where collateral has been removed or sold without bank approval and consider reclassification.
Ensure no additional facilities are granted to any borrower already listed as a wilful defaulter.
Debar promoters identified for siphoning, diversion, misrepresentation, or fraud from new finance for five years from the date of RBI publication.
Who it affects
Scheduled Primary (Urban) Co-operative Banks, Borrowers of UCBs with term loans secured by movable fixed assets or immovable property, Promoters and entrepreneurs of companies borrowing from UCBs
❓ Common questions
What exactly is the new condition added to the wilful defaulter definition?
The new condition (clause d) covers a borrower who defaults on repayment and also disposes of or removes movable fixed assets or immovable property given as security for a term loan without the bank's knowledge.
Does this circular affect all banks or only urban co-operative banks?
This circular specifically applies to all Scheduled Primary (Urban) Co-operative Banks. It does not directly address other bank categories.
What are the consequences for a borrower classified as a wilful defaulter under this expanded definition?
No additional credit facilities can be granted to such borrowers. Additionally, promoters of companies where funds have been siphoned or diverted are debarred from institutional finance for new ventures for five years from the date RBI publishes the wilful defaulter list.
📜 Read the original circular — full text as issued by RBI
RBI/2007-08/377
UBD.PCB.Cir.No.57/16.74.00/2008-09
June 24, 2008
The Chief Executive Officer of
All Scheduled
Primary (Urban) Urban Co-operative Banks
Dear Sir/Madam,
Wilful
Defaulters and action thereagainst –UCBs
Please refer
to paragraph 3 of our circular UBD.BR.Cir.1/16.74.00/2002-03 dated August 01,
2002 wherein the term “wilful default” has been defined. In
this connection, we advise that pursuant to the Hon’ble Supreme Court’s
Order relating to writ petition Civil No.291 of 1998 titled Common Cause (A registered
Society) Vs. Union of India & Anr., we had received a suggestion to expand
the scope of definition of “wilful default”. The suggestion has been
examined and it has been decided to accept the suggestion.
2. Accordingly,
it has been decided to expand the scope of definition by inserting clause (d)
in paragraph 3 of the circular referred to above, as indicated below:
3(d )
“The unit has defaulted in meeting its payment / repayment obligation
to the lender and has also disposed of or removed the movable fixed assets or
immovable property given by it for the purpose of securing a term loan without
the knowledge of the bank / lender”.
3. The modified paragraph
3 of the circular dated August 01, 2002 referred to above is Annexed.
4.
Further, we also invite your attention to para 7 (a) of the circular dated August
01, 2002 and reiterate that no additional facilities should be
granted by any Scheduled Urban Co-operative Bank to the listed wilful defaulters.
In addition, the entrepreneurs / promoters of companies where
Scheduled Urban Co-operative Banks have identified siphoning / diversion of funds,
misrepresentation, falsification of accounts and fraudulent transactions should
be debarred from institutional finance from the Scheduled Urban Co-operative Banks
for floating new ventures for a period of five years from the date the name of
the wilful defaulter is published in the list of wilful defaulters by RBI.
5.
These instructions will come into force with immediate effect.
6. Please acknowledge
receipt to the Regional Office concerned.
Yours faithfully,
(A.K.Khound)
Chief General Manager-In-Charge
ANNEX
Modified
para 3 of the RBI Circular UBD.BR.Cir.1/16.74.00/2002-03 dated August 01,
2002.
3. It has been decided to redefine the term “wilful
default”, in supersession of the definition / illustrations contained in
the Circular UBD.BR.Cir.1/16.74.00/2002-03 dated August 01, 2002, as follows:
A wilful default would be deemed to have occurred
if any of the following events noted:
The unit has defaulted in meeting
its payment / repayment obligations to the lender even when it has the capacity
to honour the said obligation. The unit has defaulted in meeting its payment
/ repayment obligation to the lender and has not utilized the finance from the
lender for the specific purposes for which finance was availed of but has diverted
the funds for other purposes. The unit has defaulted in meeting its payment
/ repayment obligations to the lender and has siphoned off the fund so that the
funds have not been utilized for the specific purpose for which finance was availed
of, nor are the funds available with the unit in the form of other assets. The
unit has defaulted in meeting its payment / repayment obligation to the lender
and has also disposed of or removed the movable fixed assets or immovable property
given by it for the purpose of securing a term loan, without the knowledge of
the bank / lender.
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-08/377 · issued 24 Jun 2008. The plain-English explanation above is BankPulse’s own independent summary.
Update your internal wilful defaulter identification policy to include the new clause (d) on unauthorized disposal of collateral.
Review existing loan accounts where collateral has been removed or sold without bank approval and consider reclassification.
📜 Compliance
Ensure no additional facilities are granted to any borrower already listed as a wilful defaulter.
Debar promoters identified for siphoning, diversion, misrepresentation, or fraud from new finance for five years from the date of RBI publication.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template
Example: if you are a Credit Manager at a bank this circular applies to (Scheduled Primary (Urban) Co-operative Banks, Borrowers of UCBs with term loans secured by movable fixed assets or immovable property, Promoters and entrepreneurs of companies borrowing from UCBs), your first concrete step on “RBI expands wilful defaulter definition for UCBs” is: “Update your internal wilful defaulter identification policy to include the new clause (d) on unauthorized disposal of collateral.” (RBI issued this 24 Jun 2008).
Circular: RBI/2007-08/377 -- RBI expands wilful defaulter definition for UCBs
Issued: 24 Jun 2008
Action required: Update your internal wilful defaulter identification policy to include the new clause (d) on unauthorized disposal of collateral.
Action required: Review existing loan accounts where collateral has been removed or sold without bank approval and consider reclassification.
Action required: Ensure no additional facilities are granted to any borrower already listed as a wilful defaulter.
Action required: Debar promoters identified for siphoning, diversion, misrepresentation, or fraud from new finance for five years from the date of RBI publication.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 05 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=4251&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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