Compromise with wilful defaulters to help banks recover dues much faster

RBI says compromise settlement is not a new regulation, has been around for over 15 years; But unlike normal defaulters, wilful and fraud accounts barred from availing bank finance for 5 years

The Reserve Bank of India on Monday clarified that banks have been allowed for compromise settlement to wilful defaulters and fraudulent accounts to help them to recover the money without much delay.

“The primary regulatory objective is to enable multiple avenues to lenders to recover the money in default without much delay. Apart from the time value loss, inordinate delays result in asset value deterioration which hampers ultimate recoveries,” RBI said in the frequently asked questions section released today.

“The imperatives for lenders are no different when it comes to recovery from borrowers classified as fraud or wilful defaulter,” the FAQ said.

On June 8, RBI issued a circular on compromise settlement with borrowers, including wilful defaulters and fraud accounts. The regulator mandated a board approved policy for compromise settlements, and proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter would require approval of the board in all cases.

The regulator has also clarified, citing a circular issued to Indian Banks’ Association in May 2007, that provision enabling banks to enter into compromise settlement with fraud or wilful defaulter is not a new regulatory instruction and has been the settled regulatory stance for more than 15 years.

Moreover, the cooling off period which has to be considered by banks before extending fresh loans to borrower with whom compromise settlement has been done, is not applicable for wilful defaulters and fraud accounts.

“…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,” the FAQ said. The five year period applies for wilful defaulters also.

On why compromise settlement is allowed for wilful defaulters and frauds, while debt restructuring isn't, RBI said, such settlement entails a complete detachment of the lender from the borrower and would enhance recovery prospects.

On the key objectives of the recent circular on compromise settlement, RBI said, “By providing a clear regulatory framework, it enables other regulated entities, particularly cooperative banks, to undertake compromise settlements as part of the normal resolution efforts.”