Introduction
A borrower’s failure to repay a loan does not, by itself, constitute willful default. The decisive question is whether the default was accompanied by a conscious, deliberate and calculated course of conduct — such as refusal to repay despite financial capacity, diversion of borrowed funds, siphoning of money, or unauthorised disposal of secured assets.
Under the RBI framework, willful default is therefore not a label to be attached mechanically to every non-performing account. It is a serious regulatory finding that must be supported by reliable material, tested through the prescribed procedure, and recorded in a reasoned decision. The borrower’s financial distress may be relevant, but it cannot automatically excuse conduct demonstrating diversion, concealment or a deliberate failure to honour repayment obligations.
The Governing Test
The traditional RBI formulation identifies willful default where:
- The borrower has the capacity to repay but deliberately fails to meet repayment obligations.
- Loan finance is not used for the sanctioned purpose and is diverted elsewhere.
- Funds are siphoned off so that they are neither used for the sanctioned purpose nor available in the form of identifiable assets.
- Secured movable or immovable assets are removed or disposed of without the lender’s knowledge.
The assessment must consider the borrower’s overall track record and should not rest upon an isolated transaction. The default must be shown to be intentional, deliberate and calculated. These principles are reproduced and applied in Vidyasagar Parchuri v. IDBI Bank, where the Telangana High Court examined allegations of diversion, non-routing of transactions and failure to recover related-party receivables.
Proof Must Be Substantial
A finding of willful default should be founded on evidence capable of establishing both the underlying default and the borrower’s culpable conduct. Relevant material may include:
- audited financial statements and stock statements;
- bank-account records and fund-flow statements;
- forensic-audit findings;
- evidence of payments to related parties;
- unexplained inter-company receivables;
- unauthorised diversion or non-routing of sale proceeds;
- evidence showing the borrower’s capacity to repay;
- records relating to the disposal or removal of secured assets; and
- the borrower’s explanations and complete repayment history.
The bank must distinguish between commercial failure and deliberate misconduct. A business may fail because of drought, market collapse, delayed finance, regulatory restrictions or a genuine liquidity crisis. Such circumstances may be relevant to the question of capacity and intention. They do not, however, neutralise independent evidence of diversion or siphoning of funds.
Conversely, mere business loss, delayed repayment, classification of an account as an NPA, or failure of a business venture cannot automatically establish willful default. The finding must connect the evidence to one of the recognised categories and explain why the conduct was deliberate rather than merely unsuccessful.
“Every willful default is a default, but every default is not willful.”
Procedural Safeguards
The consequences of a willful-defaulter declaration are severe. They may affect access to institutional credit, reputation, participation in commercial activity and, in appropriate cases, eligibility under insolvency and restructuring mechanisms — including the ineligibility that Section 29A of the Insolvency and Bankruptcy Code, 2016 attaches to persons connected with a wilfully defaulting borrower. Consequently, the procedure followed by the bank is not an empty formality.
In State Bank of India v. Jah Developers Pvt. Ltd., the Supreme Court recognised the importance of the two-tier mechanism under the RBI framework: the Identification Committee must first examine the material and issue its decision; the borrower must then receive an opportunity to make a representation; and the Review Committee must consider that representation and pass a reasoned order. The decision and reasons must be communicated to the borrower.
The Supreme Court’s approach in State Bank of India v. Rajesh Agarwal further reinforces that the principles of natural justice apply where classification carries serious civil consequences. The borrower must receive a meaningful opportunity to answer the material relied upon, and the decision-maker must genuinely consider the explanation before arriving at an adverse conclusion.
The Bombay High Court’s Contribution — Kanchan Motors To Milind Patel
The Bombay High Court has, across a consistent line of authority, fortified the Jah Developers safeguards with granular procedural content. In Kanchan Motors and Others v. Bank of India & Ors., the Court insisted on clarity in the show-cause notice itself and held that non-speaking orders passed at either the Identification Committee or the Review Committee stage will not be sustained. In Narendra Seoomal Sabnani & Others v. State Bank of India & Others, a Division Bench reiterated that because the penal consequences of the wilful-defaulter tag are substantial and severe, recorded reasons and fair play are imperative at every stage.
This line culminated in Milind Patel v. Union Bank of India & Ors., where the Division Bench went further and held that a bank invoking the Master Circular must supply the noticee with all relevant material — both incriminating and exculpatory — and not merely the material expressly relied upon in the show-cause notice. The Court drew directly on the Supreme Court’s reasoning in T. Takano v. Securities and Exchange Board of India, where it was held that the true test for disclosure is not whether the authority chooses to rely upon a document, but whether the document is relevant to the adjudication and could, in reasonable probability, have influenced the outcome. The Bombay High Court also required banks to identify the individual members of the Identification and Review Committees and to share their reasoned orders, and directed that any prior publication of a since-withdrawn wilful-defaulter finding be removed from public record.
A parallel obligation of transparency was recognised by the Delhi High Court in Frost International Limited v. Punjab National Bank, which required the Identification Committee to issue a reasoned order upon receipt of the borrower’s representation before the matter proceeds to the Review Committee — reinforcing that the two-tier structure is substantive, not ceremonial.
Fraud Classification As A Comparator — Amit Iron
Although concerned with fraud rather than wilful-default classification, the Supreme Court’s 2026 decision in State Bank of India v. Amit Iron Private Limited & Ors. offers a useful and current illustration of how these safeguards are calibrated. The Court held that the RBI’s 2024 framework — requiring a detailed show-cause notice, a minimum twenty-one-day response window, consideration of the reply and a reasoned order — satisfies natural justice without conferring an independent right to an oral or personal hearing. At the same time, the Court held that furnishing the complete forensic-audit report to the borrower is the rule, subject only to narrow, recorded redactions for genuinely sensitive third-party material. The distinction the Court drew — between a written, document-based due process and an automatic oral hearing — is directly transferable to willful-default proceedings, where banks and borrowers alike have sought clarity on the same question.
A Reasoned Order Is Essential
A valid order should not merely reproduce the allegations in the show-cause notice. It should identify:
- the specific act said to constitute willful default;
- the documentary or audit evidence supporting that conclusion;
- the borrower’s response to each material allegation;
- the reasons for accepting or rejecting that response;
- the applicable RBI category; and
- the basis for concluding that the conduct was intentional, deliberate and calculated.
A conclusion unsupported by analysis is vulnerable to challenge as mechanical, arbitrary or contrary to natural justice. In Vidyasagar Parchuri, the Telangana High Court emphasised that judicial review may be limited in matters involving expert financial committees, but intervention remains possible where the decision is perverse, arbitrary, unsupported by material or affected by a substantial procedural defect. The Bombay High Court’s insistence, in Kanchan Motors and again in Milind Patel, that both the draft order of the Identification Committee and the final order of the Review Committee be independently reasoned gives that principle practical teeth.
Concluding Proposition
The legal position may be stated in precise terms:
“Every willful default is a default, but every default is not willful.”
Willful default is established not by the existence of unpaid debt alone, but by a proven combination of default, capacity or culpable conduct, reliable evidence and procedural fairness. The classification must therefore be certified by conduct, fortified by documentary proof, and verified through a reasoned and fair decision-making process — a process now further calibrated by the Bombay High Court’s disclosure jurisprudence in Milind Patel and the Supreme Court’s 2026 clarification in Amit Iron on the limits of the personal-hearing right.
Citation Table
| Case | Citation | Significance |
|---|---|---|
| State Bank of India v. Jah Developers Pvt. Ltd. | (2019) 6 SCC 787 | Landmark two-tier procedure ruling |
| State Bank of India v. Rajesh Agarwal & Ors. | 2023 SCC OnLine SC 342; Civil Appeal No. 7300 of 2022, decided 27.03.2023 | Principles of natural justice in proceedings carrying serious civil consequences |
| State Bank of India v. Amit Iron Private Limited & Ors. | 2026 INSC 323 | Recent Supreme Court decision |
| T. Takano v. Securities and Exchange Board of India | 2022 SCC OnLine SC 210; Civil Appeal Nos. 487-488 of 2022, decided 18.02.2022 | Disclosure of relevant material |
| Milind Patel v. Union Bank of India & Ors. | 2024:BHC-OS:4430-DB (Bom HC, 11.03.2024); also (2024) 251 Comp Cas 1 | Bench (Colabawalla & Sundaresan, JJ.) |
| Kanchan Motors and Others v. Bank of India & Ors. | 2018 SCC OnLine Bom 1761 | Reasoned orders and clarity in show-cause notices |
| Narendra Seoomal Sabnani & Others v. State Bank of India & Others | 2021 SCC OnLine Bom 4604 | Recorded reasons and fair play |
| Frost International Limited v. Punjab National Bank | 2021 SCC OnLine Del 3683 | Reasoned order at the Identification Committee stage |
| Vidyasagar Parchuri v. IDBI Bank | Telangana HC, WRIT PETITION No. 11567 OF 2025 decided 01.12.2025; 2025 Supreme (Telangana) 2208 | Diversion, non-routing, related-party receivables |
Practitioner’s Checklist
Before Advising A Lender On A Wilful-Default Proposal
- Confirm the account crosses the applicable outstanding threshold and has been reviewed for wilful default within the RBI-mandated timeline.
- Assemble evidence under each of the four recognised categories (capacity with refusal; diversion; siphoning; unauthorised disposal of security) — do not proceed on an isolated transaction.
- Distinguish genuine commercial failure (market collapse, delayed finance, regulatory restriction) from deliberate misconduct, and record that distinction in the file.
- Ensure the show-cause notice discloses all relevant material, incriminating and exculpatory alike, per Milind Patel and T. Takano—not merely what the bank intends to rely upon.
- Identify the members of the Identification Committee and Review Committee and be prepared to disclose them if challenged, per Milind Patel.
- Build a draft order — and, later, a final order — that individually addresses each of the borrower’s submissions rather than reciting the show-cause notice, per Kanchan Motors and Narendra Seoomal Sabnani.
- Do not treat the absence of a personal hearing, by itself, as fatal — Amit Iron confirms written process can suffice — but ensure full audit/forensic material is furnished regardless.
- Cross-check every citation before filing; disclose, rather than paper over, any citation that cannot be independently verified.
Before Advising A Borrower Resisting A Wilful-Default Proposal
- Demand copies of all material referred to and relied upon, and press for exculpatory material under Milind Patel and T. Takano.
- Test whether the bank’s evidence is confined to a solitary transaction or genuinely reflects an overall track record.
- Where financial distress is genuine, marshal contemporaneous evidence of it (regulatory orders, market data, correspondence) to rebut an inference of deliberate default.
- Scrutinise both the Identification Committee’s draft order and the Review Committee’s final order for reasoned engagement with the representation, not mere reiteration.
- Where a wilful-defaulter finding has already been publicised and is later withdrawn, seek a direction for removal from public and credit-information records, per Milind Patel.
Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]
