Banks seek RBI's clarification on fresh funding to wilful defaulters

Banks have sought clarification from the Reserve Bank of India (RBI) on whether the latest guidelines on compromise settlement, which allows lenders to extend loans to defaulters after a cooling off following a compromise settlement, are also applicable to wilful defaulters and fraud accounts.

According to top banking industry sources, lenders need flexibility for compromise settlements with respect to issues like following debt-recast norms and staff accountability.

On June 8, the banking regulator issued norms on compromise settlement in which regulated entities were allowed to undertake compromise settlements or technical write-offs. This is in respect to accounts categorised as wilful defaulters or fraud, without prejudice to the criminal proceedings underway against such debtors.
 

“A company, which was classified as fraud or wilful defaulter, remains so even after a change in management. In the current scheme of things, we cannot take away the fraud tag.

If such a company had to be funded by another bank, how will it happen if it is totally prohibited,” said a senior banker from a large public sector bank. “If the company is sold to another owner why should the company continue to suffer,” the banker added.

RBI had suggested a minimum cooling off period of 12 months, (except for farm loans), after a compromised settlement is reached, for extending fresh loans. Banks have also sought clarification on the way the value of the settlement is determined.

Banks typically calculate the net present value (NPV) of the security and compare it with the settlement amount, which is mostly in cash.

In case the NPV is lower than the cash, they proceed with a compromise settlement. RBI now wants details of the ageing of the security, deterioration of the security and other details.

“Once we do a valuation from an approved valuer, they take all of these into account. RBI wants us to be more detailed and more granular in case banks have missed something and in case we are just relying on the collateral security by the valuer. They want more details from the bank’s side,” said a source.

RBI also said that banks should put in place a graded framework for examination of staff accountability with reasonable thresholds and timelines as decided by the Board.

“Compromise settlement should be allowed even if staff accountability is not completed. These are two different processes. One is a disciplinary process and the compromise is a financial transaction. If we say without staff accountability, we cannot do a compromise, then it will stop many of the transactions from going through,” another banker said.

In the circular, RBI said that compromise settlements, where the time for payment of the agreed settlement amount exceeds three months, shall be treated as restructuring. Banks have also requested for flexibility on treating such accounts as restructuring.

“We have requested not to fully implement the restructuring framework. They can say the provision should not be reversed or asset classification cannot be changed. On this issue also, we have asked them for clarification,” the source said.

Key highlights

• The RBI allowed banks to undertake compromise settlements with wilful defaulters 
• Even after such settlements, criminal proceeding to continue for fraud accounts 
• All fraud accounts are wilful defaulters but not all wilful defaulters are fraud
• The RBI mandates minimum 12-month cooling-off period before extending fresh loan following compromise settlement with defaulters
• Banks to have comprehensive board approved for all compromise settlements