The RBI has allowed lenders to enter into compromise settlements with accounts classified as "fraud" and "wilful defaulters".
While these agreements can be entered into with wilful defaulters and fraudulent accounts, it will be without prejudice to the criminal proceedings against the borrower, the Reserve Bank of India said in its framework for settlements and technical write-released on Thursday.
The framework is applicable to all lenders, including banks, cooperative banks, non-bank lenders, and all-India financial institutions. It requires lenders to lay down a board-approved policy for such arrangements with specific guidance on required conditions, such as minimum ageing and reduction of collateral value.
Compromise settlements refer to an arrangement wherein borrowers fully settle claims in cash, but it also involves the lender sacrificing some of the amount owed—effectively taking a haircut on the loan.
Technical write-offs refer to cases where the lender has written off the account for accounting purposes but the bad loan continues to be outstanding at the individual borrower's level. It does not involve waiving any part of the loan.
In cases where the lenders have initiated a judicial recovery proceeding against the borrowers and then arrive at a compromise, the RBI specifies that the arrangement will be subject to obtaining a consent decree from the judicial authority concerned.
For compromise settlements, banks are required to ensure that the power for such approvals rests with a bank officer or a committee, which is at least one level higher than the officer or committee deciding credit sanctioning, according to the framework.
In compromise settlements, where repayment periods exceed three months, the account will be treated as restructured, it said. Lenders will also be required to have a reporting mechanism, at least on a quarterly basis, for approved compromise settlements and technical write-offs.
The board-approved policy covering such arrangements shall also mandate a reporting format, according to the framework. The format is required to cover the following basic elements:
Trend in the number of accounts and amounts subjected to compromise settlement and/or technical write-off—sequentially and year-on-year.
Out of the above, a separate breakup of accounts classified as fraud, red-flagged, wilful default, and quick mortality accounts
Amount-wise, sanctioning authority-wise, and business segment- or asset-class-wise grouping of such accounts
Extent of recovery in technically written-off accounts
For borrower accounts that undergo compromise settlements, lenders will also have to undergo a cooling-off period before they can take fresh exposure, according to the framework. For non-farm credit, the cooling period will be a minimum of 12 months. For farm credit, the period will be determined by lenders as per board-approved policies.
Cooling periods for exposures subjected to technical write-offs will be as per the board-approved policies as well.
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