Compromise settlement with wilful defaulters is not new, says RBI

The Reserve Bank of India (RBI) on June 20 said a compromise settlement with wilful defaulters is not new and has been there for more than 15 years.

The central bank had on June 8 issued a circular framework for compromise settlements and technical write-offs.

"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 more than 15 years," the RBI said in a release on FAQs on the framework.

The banking regulator said a compromise settlement with borrowers aim to enable multiple avenues to lenders to recover the money in default without much delay.

Also read: Banking Central | Why outrage against RBI over compromise settlement for wilful defaulters is misplaced

Further, on the dilution of penal measures, the central bank said it will remain unchanged what has been mentioned in the Master Directions on Frauds dated July 1, 2016, and the Master Circular on Wilful Defaulters dated July 1, 2015.

These penal measures entails that no additional facilities should be

granted by any bank/ FI to borrowers listed as wilful defaulters, and that such companies 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.

"In addition, 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," RBI added.

The FAQ also said that borrowers classified as fraud or wilful defaulter

will not be able to borrow fresh funds from the lenders after the cooling

period of 12 months.

The central bank also said prudential guidelines provide sufficient safeguards and 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 judgement.

Also read: India bank unions ask RBI to withdraw compromise settlement for wilful defaulters

It said that all decision regarding this should be taken by lenders as per their board approved policies.

On the objectives front, the central bank further said clear regulatory framework enables other regulated entities, particularly cooperative banks, to undertake compromise settlements as part of the normal resolution efforts.

It also provides clarity on definition of technical write-off and provides a broad guidance on the process to be followed by the regulated entities.