MUMBAI: The Reserve Bank of India (RBI), on Tuesday, clarified it has not added any new clause allowing banks to enter into compromise settlement with wilful defaulters and the provisions for defaulters with such borrowers have been there for over 15 years.
The clarification comes after the circular on compromise settlements with wilful defaulters and technical write-offs attracted criticism from stakeholders. To bring more clarity on the issue, the RBI released frequently asked questions (FAQs) on the ‘Framework for Compromise Settlements and Technical Write-offs’ circular, which was released on June 8.
“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 over 15 years.”
RBI had advised IBA vide letter dated May 10, 2007 that, “banks may enter into compromise settlement with wilful defaulters/fraudulent borrowers without prejudice to the criminal proceeding underway against such borrowers,” said RBI. Such cases of compromise settlements should be vetted by the management committee/ Board of banks, noted the FAQs.
RBI said the recent circular doesn’t dilute the penal measures applicable to borrowers classified as wilful defaulters or fraud. The penal measures currently applicable to borrowers classified as fraud or wilful defaulters remain unchanged and should continue to be applicable in cases where the banks enter into compromise settlements with such borrowers.
Such penal measures entail that no additional facilities should be granted by any bank or financial institution to borrowers listed as wilful defaulters and such companies (including their entrepreneurs or promoters) be 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, it noted.
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. According to the RBI, a compromise settlement is not available to borrowers as a matter of right, rather it is a discretion to be exercised by the lenders based on their commercial judgment.
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, said the central bank.
Clarifications on compromise settlement
Provision for compromise settlement with wilful defaulters not new
New circular does not dilute the penal measures for wilful defaulters
Borrowers classified as fraud barred from availing finance for five years
Compromise settlement has been there for over 15 years