RBI permitted Regulated Entities (Res) like banks, NBFCs, and other financial institutions to put in place Board-approved policies for undertaking compromise settlements with the borrowers as well as for technical write-offs.
Compromise settlement for this purpose shall refer to any negotiated arrangement with the borrower to fully settle the claims of the RE against the borrower in cash; it may entail some sacrifice of the amount due from the borrower on the part of the REs with the corresponding waiver of claims of the RE against the borrower to that extent.
Technical write-off for this purpose shall refer to cases where the non-performing assets remain outstanding at the borrowers’ loan account level but are written off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.
The board-approved policy shall comprehensively lay down the process to be followed for all compromise settlements and technical write-offs, with specific guidance on the necessary conditions. The conditions would include precedents such as minimum aging, deterioration in collateral value, etc.
The policies would also put in place a graded framework for the examination of staff accountability in such cases with reasonable thresholds and timelines as may be decided by the board.
“In respect of compromise settlements, the policy shall inter alia contain provisions relating to permissible sacrifice for various categories of exposures while arriving at the settlement amount, after prudently reckoning the current realisable value of security/collateral, where available. The methodology for arriving at the realisable value of the security shall also form part of the policy. The objective would be to maximise the possible recovery from a distressed borrower at minimum expense, in the best interest of the Regulated Entity (RE)”, the central bank notification said.
“The compromise settlements and technical write-offs would be without prejudice to any mutually agreed contractual provisions between the RE and the borrower relating to future contingent realisations or recovery by the RE, subject to such claims not being recognised in any manner on the balance sheet of REs at the time of the settlement or subsequently till actual realisation of such receivables,” it said.
Any such claims recognised on the balance sheet of the RE would render the arrangement to be treated as restructured as per the extant guidelines, it added.
In respect of compromise settlements, Regulated Entities shall ensure that:
(i) Delegation of power for such approvals rests with an authority (individual or committee, as the case may be) that is at least one level higher in the hierarchy than the authority vested with the power to sanction the credit/investment exposure. However, any official who was part of sanctioning the loan (as an individual or part of a committee) shall not be part of approving the proposal for compromise settlement of the same loan account, in any capacity.
(ii) Proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter shall require approval of the Board in all cases, as per extant guidelines of RBI in this regard.
The aforesaid policy shall also cover the delegation of powers for approval/sanction of compromise settlements and technical write-offs.
In respect of borrowers subject to compromise settlements, where the time for payment of the agreed settlement amount exceeds three months shall be treated as restructuring as defined in terms of the Prudential framework on Resolution of Stressed Assets dated June 7, 2019, the notification said, there would be a cooling period as determined by the respective board-approved policies before the REs can assume fresh exposures to such borrowers, it said.
In case of partial technical write-offs, the prudential requirements in respect of residual exposure, including provisioning and asset classification shall be with reference to the original exposure subject to the amount of provision including the amount representing partial technical write-off shall meet the extant provisioning requirements, as computed on the gross value of the asset.