No new clause permitting lenders to enter into compromise settlement with wilful defaulters, clarifies RBI

The Reserve Bank of India on Tuesday clarified that it has not introduced any new clause that permits lenders to enter into compromise settlements with borrowers classified as fraud of willful defaulters. The central bank released an 8-point frequently asked questions (FAQs) clarifying concerns raised regarding its earlier circular on the ‘Framework for Compromise Settlements and Technical Write-offs' issued on June 8.

“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,” clarified RBI.

The Reserve Bank of India (RBI) has introduced a comprehensive regulatory framework for compromise settlements and technical write-offs, which aims to enhance the resolution of stressed assets and streamline instructions for regulated entities. The June 8 circular was aimed at rationalising the existing regulatory guidance to banks on compromise settlements.

Compromise settlements and RBI clarification

RBI has defined compromise settlement as any negotiated arrangement with the borrower with full settlement of the regulated entities against the borrower in cash. Such a settlement may involve some sacrifice of the amount that is due from the borrower on the part of the regulated entity. This is similar to one-time settlements.

There were speculations that the circular would dilute the penal provisions applicable to the borrowers classified as wilful defaulter or fraud. However, the RBI has clarified that the June 8 circular does not dilute the penal measures available to the banks in case of wilful defaulters.  

In its clarification the central bank said that the penal measures currently applicable to borrowers classified as fraud or wilful defaulter in terms of the Master Directions on Frauds dated July 1, 2016, and the Master Circular on Wilful Defaulters dated July 1, 2015, respectively, remain unchanged and shall continue to be applicable in cases where the banks enter into compromise settlement with such borrowers.

The bank regulator also said that borrowers classified as the willful defaulters and fraud won’t be able to borrow from the banks even after the minimum cooling period of 12 months, prescribed in the circular.

The circular had laid out that the bar on taking fresh exposure during the cooling-off period is on the regulated entities in the arrangement and it did not suggest any prohibition on other lenders offering loans during this period. This had raised concerns among few lenders.