A High Court has set aside a bank's classification of a corporate borrower, Ashoka Textiles Ltd., as a 'wilful defaulter' after finding that the bank's internal Identification Committee had skipped several mandatory steps set out in the Reserve Bank of India's Master Direction on Wilful Defaulters. The Court held that the classification carries serious civil consequences, including a bar on raising fresh finance and potential criminal exposure for promoters: and cannot be made through a purely internal, paper-based process that denies the borrower a genuine opportunity to respond.
The RBI's framework requires a two-stage internal process: an Identification Committee first forms a prima facie view and issues a show-cause notice calling for the borrower's submissions, and only thereafter does a separate Review Committee, chaired by an official senior to those on the Identification Committee, confirm or reject the classification after considering the borrower's reply. In this case, the bank had issued a show-cause notice but proceeded to finalise the classification before the borrower's response was placed before, or meaningfully considered by, the Review Committee.
The Court reiterated that while wilful defaulter classification is essentially an internal credit-discipline mechanism and not a judicial proceeding, the RBI's own framework builds in natural justice safeguards precisely because of the classification's reputational and business consequences, and a bank cannot treat those safeguards as optional formalities. The bench directed the bank to restart the process from the Review Committee stage, giving the borrower a fresh opportunity to be heard before any final order is passed.