RBI permits banks to undertake compromise settlement of wilful defaults, fraud accounts

In order to ensure maximum recovery from distressed assets, the Reserve Bank of India has allowed banks to go for compromise settlement of fraud accounts and wilful defaults. All regulated entities (REs) will be required to put in place board-approved policies for undertaking compromise settlements, with the borrowers as well as for technical write-offs laying down the process to be followed for all compromise settlements and technical write-offs, with specific guidance on the necessary conditions precedent, the RBI has said in a notification.

Conditions would include minimum ageing, deterioration in collateral value etc., it said.

The policies would also put in place a graded framework for the examination of staff accountability in such cases with reasonable thresholds and timelines as may be decided by the board.
REs may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway 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 realisable value of security/collateral, where available," as per the notification.

The methodology for arriving at the realisable value of the security shall also form part of the policy.

The objective would be to maximise the possible recovery from a distressed borrower at minimum expense, in the best interest of the Regulated Entity (RE).

"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 realisations or recovery by the RE, subject to such claims not being recognised in any manner on the balance sheet of REs at the time of the settlement or subsequently till actual realisation of such receivables," it said.

Any such claims recognised on the balance sheet of the RE would render the arrangement to be treated as restructured as per the extant guidelines, it added.

In respect of borrowers subject to compromise settlements, the notification said, there would be a cooling period as determined by the respective board-approved policies before the REs can assume fresh exposures to such borrowers.

The cooling period in respect of exposures other than farm credit exposures would be subject to a floor of 12 months.

However, it said, REs are free to stipulate higher cooling periods in terms of their Board approved policies. The cooling period for farm credit exposures would be determined by the REs as per their respective Board approved policies.