Compromise settlement is not available to borrowers as a matter of right: RBI

The Reserve Bank of India (RBI) has plugged interpretation gaps in its recently issued circular on “Framework for Compromise Settlements and Technical Write-offs”, clarifying “penal measures” and “minimum cooling period”, among others, through frequently asked questions.

This comes in the wake of Bank unions opposing a clause in the circular that allows Banks’ Boards to take up proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter.

The central bank underscored that 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.

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The RBI said the rationale for permitting lenders to enter into compromise settlement with borrowers classified as fraud or wilful defaulter is to enable multiple avenues to lenders to recover the money in default without much delay. Apart from the time value loss, inordinate delays result in asset value deterioration, which hampers ultimate recoveries.

The central bank emphasised that penal measures currently applicable to borrowers classified as fraud or wilful defaulter in terms of the Master Directions on Frauds (July 1, 2016) and the Master Circular on Wilful Defaulters (July 1, 2015), respectively, remain unchanged.

These measures shall continue to be applicable in cases where the banks enter into a compromise settlement with such borrowers.

“Such penal measures entail, inter alia, that no additional facilities should be granted by any bank or FI to borrowers listed as wilful defaulters and that such companies (including their entrepreneurs or 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,” the central bank said.

In addition, borrowers classified as fraud are debarred from availing of bank finance for a period of five years from the date of full payment of the defrauded amount.

Cooling period

RBI said the cooling period (subject to a floor of 12 months before regulated entities can assume fresh exposures to such borrowers) has been introduced as a general prescription for normal cases of compromise settlements, without prejudice to the penal measures applicable in respect of borrowers classified as fraud or wilful defaulter as per the mentioned earlier.