Willful defaulter classification requires reasons, notice, representation, and strict compliance with RBI procedure before adverse branding.

A bank cannot proceed to classify a borrower as a willful defaulter on a bare preliminary view without recording reasons, supporting material, and compliance with the RBI Master Circular procedure. The prescribed scheme requires a tentative decision by the committee headed by the executive director, communication of the proposal and reasons to the borrower, an opportunity to make a representation, and a final decision by the grievance redressal committee headed by the chairman and managing director. These safeguards are intended to ensure fairness and natural justice before a borrower is branded a willful defaulter. Notices issued without following this process were unsustainable and were set aside, leaving the bank free to restart proceedings in accordance with the Circular.

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Issues: Whether the bank could proceed on a proposal to classify the borrower as a willful defaulter without recording reasons and without complying with the procedure prescribed in the RBI Master Circular on willful defaulters.

Analysis: The procedure in paragraph 3 of the Master Circular contemplates only a tentative preliminary view by the committee headed by an executive director, followed by communication of the proposal and reasons to the borrower, an opportunity to make a representation, and a final decision by the grievance redressal committee headed by the chairman and managing director. The scheme is designed to ensure fairness and to prevent branding a borrower as a willful defaulter without reasons, supporting material, and an effective opportunity of representation. A bare preliminary opinion unsupported by reasons or evidence does not satisfy the prescribed procedure or the requirements of natural justice.

Conclusion: The impugned notices were unsustainable and were set aside, and the bank was left free to proceed afresh in accordance with the Master Circular.

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