Reserve Bank of India (Local Area Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025
UR
- Applies toLocal area banks
- StatusIn force
- ImportanceMUST READ
- IssuedNov 28, 2025
- Amendmentsnone tracked
- Length70 points in 5 sections · 6 min read
The four dates on this rule
- PublishedNov 28, 2025The day RBI put this document out.
- Starts to applyNot statedNot stated separately in this document. Read the rule itself before you assume a start date.
- Time to get readyNot statedCannot be worked out until the day it starts to apply is known.
- Last date to actNot statedNo date to act by was found in this document. Other dates may sit inside single paragraphs.
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Numbers to remember
| 21 days | The accused person gets 21 days to reply to a show-cause notice. RBI Para 5(4) |
| ₹25 lakh | Every bad loan of ₹25 lakh and above must be examined for wilful default. RBI Para 6(1) |
| six months | Banks must decide wilful defaulter status within six months of the account becoming an NPA. RBI Para 6(2) |
| one year | Banks cannot give a wilful defaulter new credit for one year after removal from the list. RBI Para 7(3) |
| ₹1 crore | Unapplied interest counts towards the ₹1 crore threshold. RBI Para 11(2) |
| 30 days | Banks must remove a name from the list within 30 days once dues fall below 25 lakh rupees. RBI Para 12(2) |
What it says
Opening paragraphs
1. Warn the other lenders
The rules aim to spread word of a wilful defaulter so no fresh money reaches him.
Chapter I. Preliminary
Do it
1. Independent directors chair it
In that case independent or non-executive directors must chair the committee.
Background
2. Wilful default for LABs
This paper sets how local area banks name a wilful defaulter.
3. Start date
These Directions came into effect on the day RBI issued them.
4. Who is covered
These Directions apply to every local area bank.
5. Every RBI-regulated lender
The bar on fresh money to a wilful defaulter binds every lender RBI regulates.
6. A guarantor is defined
A guarantor is the person or firm that has guaranteed the credit facility.
7. Whole-Time Director if vacant
Where the chief executive's post is vacant, a Whole-Time Director takes his place.
8. Two committees, no overlap
No one on the first committee may sit on the second.
9. What siphoning means
Siphoning is using loan money for work that has nothing to do with the borrower.
10. What suit filed means
A suit filed account is one taken to a court or tribunal for recovery.
11. Still suit filed on appeal
An account stays suit filed while an appeal or execution is still running.
Chapter III. Treatment of Wilful Defaulters
Must know
1. 21-day reply window
The accused person gets 21 days to reply to a show-cause notice.
2. No lawyers at hearing
The accused person cannot bring a lawyer to this in-house hearing.
3. Twenty-five lakh triggers a check
Every bad loan of ₹25 lakh and above must be examined for wilful default.
4. Six-month decision deadline
Banks must decide wilful defaulter status within six months of the account becoming an NPA.
5. One-year credit ban
Banks cannot give a wilful defaulter new credit for one year after removal from the list.
Do it
6. It must be deliberate
The default must be planned and meant, to count as wilful.
7. Show all the material
Everything the show cause notice rests on must be disclosed to the borrower.
8. Reasons must be written
The first committee must put its reasons in writing to the second.
9. Tell them of the proposal
The borrower must be told of the proposal to class him as a wilful defaulter.
10. Their reply goes up
The written reply must go to the review committee with the proposal.
11. A personal hearing is due
The second committee must offer a hearing in person first.
12. A reasoned order, served
The review committee must pass a reasoned order and send it to the defaulter.
13. Name the committee members
The notice and the order must say they carry committee approval and name its members.
14. Flag the nominee director
A non-whole-time, independent or nominee director so classed must be reported as such.
15. Look again later
Where no wilful default was seen at first, the account must be re-examined later.
16. Photo publication policy
The bank's board must approve the policy for publishing a wilful defaulter's photo.
17. A covenant against the listed
Every loan agreement must bar taking a listed defaulter onto the board.
18. Move to court without delay
Court action to get the money back must be started fast.
19. The process must be open
The whole process must be open, so no room is left for choice.
20. Internal audit checks it
Internal auditors must check that the rules were followed.
21. Audit Committee reviews cases
The Audit Committee must review wilful default cases from time to time.
22. Find the root cause
That review must find the root causes and fix any gap in the process.
Background
23. Follow the set procedure
A person may be classed a wilful defaulter only by the procedure set out here.
24. Look at the whole record
Wilful default is judged on the borrower's track record, not one stray incident.
25. Identification Committee
The bank's Identification Committee first reviews the evidence of wilful default.
26. 15-day review window
The accused person gets 15 more days to write to the Review Committee.
27. Removal does not end it
Taking a name off the list does not stop criminal proceedings already begun.
28. Penalty ends with the tie
The penalties stop applying to an associated firm once the tie is broken.
29. Associated firms are caught
Every firm a wilful defaulter runs or sits on the board of is tied to him.
30. Go straight to the guarantor
On default the lender may proceed against the guarantor without first exhausting the borrower.
31. A refusing guarantor is caught
A guarantor who refuses the demand may himself be classed a wilful defaulter.
32. Judge each company alone
In a group, each borrowing company is judged on its own repayment record.
Chapter IV. Reporting of Wilful Defaulters and Large Defaulters
Must know
1. One crore includes unapplied interest
Unapplied interest counts towards the ₹1 crore threshold.
BankPulse example. Suppose the principal outstanding is ₹98 lakh and the unapplied interest is ₹4 lakh. Together that is ₹1.02 crore. The account crosses the ₹1 crore threshold, because the interest counts.
2. 30-day list removal
Banks must remove a name from the list within 30 days once dues fall below 25 lakh rupees.
3. Investigate before you sell
A defaulted loan of ₹25 lakh and above must be investigated before it is transferred.
Do it
4. Monthly credit bureau reporting
Banks must report wilful defaulters to credit information companies every month.
5. No two-stage committee needed
That investigation need not use the two-stage committee, but must be thorough.
6. Tell the buyer
The buyer must be told what was reported and must report it onward.
7. Check the director details
Director details sent to the bureaus must be checked against the Registrar's database.
8. Report failed guarantors
Guarantors who do not honour an invoked guarantee must be reported to the bureaus.
9. Full names of directors
The full names of directors must be reported so the person can be identified.
Background
10. Suits go by sued amount
For a suit filed account the threshold is the amount sued for.
11. Off the list when paid
A name comes off the list only when the compromise amount is paid in full.
12. Part payment keeps the name
Part payment does not take the name off, even below the threshold.
13. Cancelled settlement, revised figure
If a deal is called off, the new sum owed is what gets reported.
14. Selling is not recovery
Transferring a defaulted loan does not count as recovery against the threshold.
15. New owner, clean slate
The bar lifts once a rescue plan puts the firm in new hands.
Chapter V. Preventive Measures and Role of Auditors
Must know
1. Do not lean on auditors
A lender must not go by the auditor's paper alone.
2. Report the auditor too
A complaint against an auditor goes to the Reserve Bank and the banks' association.
Do it
3. Check identical names yourself
Where two names are the same, the lender must check who is who on its own.
4. Watch where the money goes
The end use of funds must be watched and a certificate taken from the borrower.
5. End use in the policy
End use checks must form part of the lender's own loan policy document.
6. Hear the auditor first
The auditor must be given a hearing before any such report is made.
Background
7. A false certificate means court
A false paper from the borrower may take him to court.
8. Reporting negligent auditors
Banks can report negligent auditors to NFRA or ICAI.
9. A caution list of auditors
The banks' association circulates a caution list of such auditors to lenders.
Chapter VI. Repeal and Other Provisions
1. Older rules cancelled
This document cancels the older wilful-defaulter rules for Commercial Banks.
2. Old cases continue
Penalties and legal cases already started under the old rules still continue.
The same subject for other kinds of institution
The same subject for other kinds of institution.
RBI wilful defaulter rules for all India financial institutions
RBI wilful defaulter rules for asset reconstruction companies
Other RBI rules for local area banks
RBI compliance officer and compliance function rules for local area banks 2026
RBI customer service and fair conduct rules for local area banks 2025
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