Instructions On Compromise Settlements Rationalise Regulatory Norms, Says RBI

Bank unions AIBOC and AIBEA have opposed the Reserve Bank's move to allow lenders to settle loans of wilful defaulters under compromise settlement

As part of the bi-monthly monetary policy, the RBI on June 8 issued a comprehensive regulatory framework governing compromise settlements and technical write-offs covering all regulated entities.

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The Reserve Bank of India (RBI) on Tuesday said its recent instructions on 'compromise settlements and technical write-offs' have rationalised the existing regulatory guidance to banks and tightened some of the related provisions to ensure greater transparency, the PTI reported. As part of the bi-monthly monetary policy, the RBI on June 8 issued a comprehensive regulatory framework governing compromise settlements and technical write-offs covering all regulated entities.

In a follow-up, the central bank on Monday issued FAQs (Frequently Asked Questions) related to the June 8 circular. Bank unions AIBOC and AIBEA have opposed the Reserve Bank's move to allow lenders to settle loans of wilful defaulters under compromise settlement.

On whether the RBI has introduced a new clause permitting lenders to enter into compromise settlement with borrowers classified as fraud or wilful defaulters, the central bank's FAQs said "No". "The said provision enabling banks to enter into compromise settlement in respect of borrowers categorised as fraud or wilful defaulter is not a new regulatory instruction and has been the settled regulatory stance for more than 15 years," the FAQs said. It also replied in negative to a question about whether the circular dilutes the penal measures applicable to borrowers classified as wilful defaulters or fraud.

The FAQs further said that as a disincentive to both the lenders and the borrowers, the circular introduces the concept of a "cooling period" for normal cases of compromise settlement during which the lender undertaking settlement shall not take any fresh exposure on the borrower entity. "By providing a clear regulatory framework, it enables other regulated entities, particularly cooperative banks, to undertake compromise settlements as part of the normal resolution efforts," it said.

It provides clarity on the definition of technical write-offs and provides broad guidance on the process to be followed by the regulated entities for technical write-offs, which is a normal banking practice, the RBI added. It also said restructuring in general entails the lenders having a continuing exposure to the borrower entity even after restructuring and hence, in case of borrowers classified as fraud or wilful defaulters, permitting lenders to continue their credit relationship with the borrower entity would be fraught with moral hazard.

On the other hand, FAQs said a compromise settlement entails a complete detachment of the lender with the borrower. Therefore, permitting lenders to settle with the borrowers as per their commercial judgement would enhance recovery prospects.