Wilful defaulter circular compliance: RBI committee composition rules are mandatory, and non-compliance can vitiate declarations.

RBI directions issued under Section 35A of the Banking Regulation Act, 1949 have statutory force and bind banks and financial institutions, so the Master Circular on wilful defaulters was enforceable. The prescribed numerical composition of the Identification Committee and Grievance Redressal Committee was mandatory because it formed part of the two-tier regulatory mechanism for uniform and expeditious identification of wilful defaulters. A lead bank's letter did not bar an individual consortium bank from proceeding independently under the circular. The wilful defaulter declarations were nevertheless set aside because the committees were not constituted in accordance with the mandatory prescription, though the bank remained free to proceed afresh in accordance with law.

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Issues: (i) Whether the Reserve Bank of India Master Circular on wilful defaulters was binding on banks and financial institutions; (ii) whether the numerical composition of the Identification Committee and the Grievance Redressal Committee prescribed in the Master Circular was mandatory; (iii) whether the bank could initiate wilful defaulter proceedings notwithstanding the lead bank's letter dated 31 January 2012.

Issue (i): Whether the Reserve Bank of India Master Circular on wilful defaulters was binding on banks and financial institutions.

Analysis: The circular was issued under Section 35A of the Banking Regulation Act, 1949. Directions issued by the Reserve Bank of India under that provision have statutory force and bind banking companies and financial institutions. The decision also relied on the settled position that RBI directions governing banking policy and advances are enforceable and cannot be treated as merely advisory.

Conclusion: The Master Circular was binding on the bank and financial institutions.

Issue (ii): Whether the numerical composition of the Identification Committee and the Grievance Redressal Committee prescribed in the Master Circular was mandatory.

Analysis: The Master Circular created a two-tier mechanism for identifying and reviewing wilful defaulters. The prescribed composition was integral to that mechanism and not a matter left to the unrestricted discretion of the bank. Reading the numerical prescription as merely directory would introduce uncertainty, permit varying committee structures across banks, and defeat the object of uniform and expeditious identification of wilful defaulters. The committee strength therefore had to conform to the regulatory prescription.

Conclusion: The prescribed numerical composition was mandatory.

Issue (iii): Whether the bank could initiate wilful defaulter proceedings notwithstanding the lead bank's letter dated 31 January 2012.

Analysis: The lead bank's letter was not a determination under the Master Circular and did not bind an individual consortium bank. Each bank had to assess the borrower's conduct independently in relation to its own exposure and could proceed under the Master Circular if the conditions were otherwise met. The letter could not operate as a bar to the statutory/regulatory exercise required from the respondent bank.

Conclusion: The bank could proceed with wilful defaulter proceedings despite the lead bank's letter.

Final Conclusion: The impugned declarations of wilful defaulter were set aside because the committees were not constituted in accordance with the mandatory regulatory prescription, although the bank remained at liberty to proceed afresh in accordance with law.

Ratio Decidendi: A circular issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act, 1949 has binding statutory force, and where it prescribes a structured regulatory mechanism for declaring a borrower a wilful defaulter, the prescribed composition of the decision-making committees must be strictly followed.

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