Monetary policy: RBI defines technical write-offs for regulated entities

Will provide further impetus to resolving stressed assets, rationalising and harmonising instructions

The Reserve Bank of India (RBI) on Thursday prescribed a comprehensive regulatory framework for regulated entities (REs) for compromise settlements and technical write-offs to provide further impetus to resolving stressed assets and rationalising and harmonising instructions.

The REs should frame board-approved policies for compromise settlements, also known as negotiated arrangements, with the borrower to fully settle claims against the borrower in cash. This may involve some sacrifice of the amount due from the borrower.

Any arrangement involving part settlement with the borrower will be treated as restructuring. Also, where the time for payment of the agreed-upon settlement amount exceeds three months will be treated as restructuring.

Technical write-offs would refer to cases where the non-performing assets remain outstanding at the borrowers’ loan account level but are written off (fully or partially) by the RE only for accounting purposes. This is without involving any waiver of claims against the borrower.

Atul Kumar Goel, managing director and chief executive officer, Punjab National Bank, said proposing the framework for widening the scope of resolution of stressed assets indicates that the RBI is on track to instilling harmonisation across REs.

The board-approved policy should lay down the process for compromise settlements and technical write-offs, with specific guidance on the necessary conditions precedent, such as minimum ageing, deterioration in collateral value, etc. The policies should have a graded framework to examine staff accountability with reasonable thresholds and timelines, the RBI said.

REs may undertake compromise settlements or technical write-offs in accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against debtors. The board approval will be required for compromise settlements or technical write-offs for accounts categorised as wilful defaulters or fraud.

Referring to compromise settlements, the RBI said the policy should contain rules for permissible sacrifice for various exposures, after prudently reckoning the current realisable value of security/collateral.

REs should enter into a compromise settlement to maximise the possible recovery from a distressed borrower at minimum expense, in the best interests of the RE, the RBI said.

The banking regulator said in compromise settlements in non-farm credit cases, REs will maintain a cooling period of at least 12 months before they take fresh exposures to such borrowers. They can prescribe higher cooling, based on board-approved policies. The cooling period for farm credit exposures will be based on board-approved policies.

In cases REs had commenced recovery proceedings under a judicial forum and is pending before that forum, any settlement with the borrower will be subject to a consent decree from the judicial authorities concerned, the RBI added.