RBI directive on one-time-settlement with defaulters can derail banks: MP

The RBI circular permitting banks to enter into a one-time settlement with wilful defaulters poses a significant risk to the stability of financial institutions in the country, the CPI MP Binoy Viswam has said.

In a letter to Union Finance Minister Nirmala Sitharaman, Viswam said that by offering lenient settlement terms to individuals and entities that have deliberately evaded their repayment obligations, the circular undermines the fundamental principles of responsible lending and borrower accountability.

"I write to you to express my deep apprehensions regarding the circular issued by the Reserve Bank of India (RBI) permitting banks to enter into a one-time settlement (OTS) with wilful defaulters. This circular poses significant risks to the stability of our financial system," he said.

He said that such a move not only "erodes public confidence in our banking sector but also creates moral hazards by incentivizing reckless borrowing and default."

"Allowing wilful defaulters to settle their dues through a one-time payment not only undermines the integrity of the banking system but also perpetuates a culture of impunity. This policy fails to differentiate between genuine borrowers facing financial hardship and those intentionally evading repayment.

"By providing an avenue for easy escape, it unfairly disadvantages honest borrowers who diligently fulfil their repayment obligations. Therefore, it is imperative to prioritise the rights and interests of responsible borrowers who contribute to the growth and stability of our economy," he said.

He also quoted a government response to an RTI query which revealed there was a substantial increase in the reduction of NPAs due to write-offs and technical/prudential write-offs/AUC in recent years.

"It is evident that the quantum of write-offs has risen significantly, thereby raising questions about the effectiveness of such measures in promoting accountability and deterrence against wilful defaulters.

"Allowing willful defaulters to negotiate settlements that may not adequately recover the outstanding loan amount undermines the principle of holding them accountable for their actions," he said.

The Left leader also said that the move by the RBI raises serious doubts about the effectiveness of the current recovery mechanisms and the true intentions behind permitting willful defaulters to avail themselves of OTS.