MUMBAI: In a move that will make lenders extremely cautious in declaring borrowers as wilful defaulters or frauds, the Reserve Bank of India (RBI) has placed the responsibility of settling such cases with the board of directors.
Under its new guidelines, the RBI has also passed on the responsibility of deciding on a compromise settlement to the supervising office from the operating office.
The new norms on compromise settlements and technical write-offs, unveiled along with the monetary policy statement last week, come days after the RBI engaged with the boards of banks, asking them to step up and take more responsibility for the banks’ decisions.
Under the new RBI norms, lenders must have board-approved policies that outline the process for compromise settlements and technical write-offs.
The policy should include specific conditions such as the minimum ageing of the debt and collateral value deterioration. The policies must also establish a framework to assess staff accountability in such cases, with defined thresholds and timelines determined by the board.
The policies also need to ensure that individuals or committees responsible for approving such settlements hold higher authority than those sanctioning the credit or investment exposure.
“Regulated entities may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding under way against such debtors…Proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter shall require board approval in all cases,” according to the RBI circular.
This is the first time that RBI has come out with compromise norms for settling with wilful defaulters.
Earlier RBI norms had focused on ensuring that the settlement amount is not less than the net present value of the security. Banks were also barred from restructuring loans of wilful defaulters. This rule continues and banks cannot give the wilful defaulters fresh credit.
A compromise settlement refers to a negotiated arrangement between the bank and the borrower, wherein the bank agrees to settle the borrower’s debt partially by accepting a reduced amount. On the other hand, technical write-offs involve removing non-performing assets from the bank’s books for accounting purposes without waiving the bank’s right to recover the debt.
Earlier this month, addressing a conference of bank directors, RBI governor Shaktikanta Das had highlighted irregularities on how banks were dealing with bad loans.

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