What changed
RBI introduced a dedicated framework for Small Finance Banks to handle wilful defaulters and large defaulters, replacing earlier general guidelines. The directions define key terms like borrower, credit facility, and diversion of funds, and set out board responsibilities, reporting formats, and preventive measures including auditor roles.
What it means for you
Small Finance Banks must now follow a standardized, non-discriminatory process for classifying wilful defaulters, ensuring natural justice. The rules also require reporting to credit information companies, which will caution all regulated entities against extending further credit to such borrowers. This tightens the noose on defaulters and enhances credit discipline.
What you must do
- Review and update internal policies to align with the new wilful defaulter classification and reporting procedures.
- Train credit and risk teams on the definitions of diversion of funds and wilful default as per the directions.
- Ensure board-level oversight of the wilful defaulter identification and reporting process.
- Set up systems to submit data on large defaulters and wilful defaulters in the prescribed formats (Annex I and II).
- Coordinate with auditors to implement preventive measures and report any red flags promptly.
Who it affects
Small Finance Banks, Borrowers of Small Finance Banks, Credit Information Companies, Auditors of Small Finance Banks, All RBI-regulated entities (for restrictions on financing wilful defaulters)
What is the effective date of these directions?
The directions came into force with immediate effect from the date of issuance, November 28, 2025.