What changed
RBI issued the Reserve Bank of India (Local Area Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025, effective November 28, 2025. These directions replace any previous guidelines and provide a comprehensive framework for identifying, reporting, and preventing wilful defaults and large defaults by borrowers of Local Area Banks.
What it means for you
Local Area Banks must now follow a standardized, non-discriminatory process for classifying borrowers as wilful defaulters, ensuring natural justice. The directions also mandate reporting to credit information companies and impose restrictions on further credit to such defaulters, impacting lending decisions and risk management.
What you must do
- Update internal policies to align with the new wilful defaulter classification and reporting procedures.
- Ensure board-level oversight of the wilful defaulter identification process as per Chapter II.
- Report wilful defaulters and large defaulters to credit information companies in the prescribed formats.
- Implement preventive measures and auditor roles as outlined in Chapter V.
- Train staff on the definitions of diversion of funds and other key terms.
Who it affects
Local Area Banks, Borrowers of Local Area Banks, Credit information companies, Auditors of Local Area Banks
What is the effective date of these directions?
The directions came into force with immediate effect from November 28, 2025.
Do these directions apply to entities other than Local Area Banks?
Yes, the restrictions on further financial accommodation to wilful defaulters and provisions regarding large defaulters apply to all entities regulated by RBI, even if they are not lenders as defined in these directions.
What is considered 'diversion of funds' under these directions?
Diversion includes using short-term working capital for long-term purposes, deploying funds for unauthorized assets, transferring funds to subsidiaries without lender approval, routing funds through other lenders without permission, investing in other companies without approval, and shortfall in deployment of disbursed funds.