RBI allows banks to settle fraudulent and willful defaults through compromise agreements

13 Jun 2023 , 11:03 AM

The Reserve Bank of India has permitted banks to resolve fraudulent accounts and willful defaults through compromise in order to secure the highest recovery from distressed assets.

The RBI has stated in a notification that all regulated entities (REs) will be required to implement board-approved policies for carrying out compromise settlements with the borrowers as well as for technical write-offs outlining the procedure to be followed for all compromise settlements and technical write-offs, with specific guidance on the necessary conditions precedent.

According to the statement, requirements would include minimum ageing, a decline in collateral value, etc.

The policies would also establish a graded structure with realistic criteria and timetables, as determined by the board, for the investigation of staff accountability in such circumstances.

Regarding accounts labeled as wilful defaulters or fraud, REs may enter into compromise agreements or technical write-offs without jeopardizing the ongoing criminal investigation against such debtors.

‘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 realizable value of security/collateral, where available,’ according to the notification.

The method used to determine the security’s realizable value must be included in the policy.

In the best interest of the Regulated Entity (RE), the goal would be to optimize the potential recovery from a distressed borrower at the lowest possible cost.

According to the statement, ‘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 realizations or recovery by the RE, subject to such claims not being recognized in any manner on the balance sheet of REs at the time of the settlement or subsequently until actual realization of such receivables.’

Any such claims would cause the arrangement to be treated as restructured in accordance with the current regulations, it was added.

The letter stated that before the REs can take on new exposures to borrowers who are the subject of compromise settlements, there will be a cooling-off period as established by the relevant board-approved procedures.

A floor of 12 months would apply to the cooling period for exposures other than farm credit exposures.

Nevertheless, it stated that REs are free to impose longer cooling times in accordance with the conditions of their Board-approved regulations. The REs would choose the cooling down period for farm credit risks based on the board-approved policies for each RE.

For feedback and suggestions, write to us at [e-mail]