Does RBI circular dilute the penal measures on borrowers classified as wilful defaulter or fraud?

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

RBI denied that it has introduced a new clause permitting lenders to enter into compromise settlements with borrowers classified as fraud or wilful defaulters. “The penal measures currently applicable to borrowers classified as fraud or wilful defaulter in terms of the Master Directions on Frauds remain unchanged, and shall continue to be applicable in cases where the banks enter into compromise settlement with such borrowers”, it said. On the other hand, FAQs said a compromise settlement entails a complete detachment of the lender from the borrower. Therefore, permitting lenders to settle with the borrowers as per their commercial judgment would enhance recovery prospects, it said.

As per existing rules, Such penal measures entail inter alia that no additional facilities should be granted by any bank/ FI to borrowers listed as wilful defaulters and that such companies (including their entrepreneurs/ promoters) get debarred from institutional finance for floating new ventures for a period of five years from the date of removal of their name from the list of wilful defaulters. In addition, borrowers classified as fraud are debarred from availing bank finance for a period of five years from the date of full payment of the defrauded amount.

The central bank further clarified that its circular dated June 8, 2023, is intended to achieve the following objectives:

1. It rationalises the existing regulatory guidance to banks on compromise settlements, consolidating various instructions issued over the years. It also tightens some of the related provisions and ensures greater transparency.
2. 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.
3. 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 FAQs further clarified 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.

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