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Framework for Compromise Settlements and Technical Write-offs

Reserve Bank of India (RBI) has released the framework for compromise settlements and technical write-offs.

What is compromise settlement?

Compromise settlement refers to any negotiated arrangement with the borrower to fully settle the claims of the Regulated Entity (RE) against the borrower in cash. It may entail some sacrifice of the amount due from the borrower on the part of the REs with corresponding waiver of claims of the RE against the borrower to that extent.

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. 

What is technical write-offs?

Technical write-off refers to cases where the non-performing assets remain outstanding at borrowers’ loan account level, but are written-off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.

What shall be the cooling period for accounts subjected to compromise settlement or technical write-off?

In respect of borrowers subject to compromise settlements, there shall be a cooling period before the REs can assume fresh exposures to such borrowers, subject to the following –

  • The cooling period in respect of exposures other than farm credit exposures shall be minimum 12 months. REs are free to stipulate higher cooling periods in terms of their Board approved policies.
  • The cooling period for farm credit exposures shall be determined by the REs as per their respective Board approved policies.

The cooling period to be adopted in respect of exposures subjected to technical write-offs shall be as per the Board approved policies of the REs.

What additional instructions are applicable to accounts classified as fraud or wilful defaulter?

  • Proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter shall require approval of the Board in all cases.
  • REs may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.
  • As per Master Directions on Frauds dated July 01, 2016 (updated as on July 03, 2017), borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from Scheduled Commercial Banks, Development Financial Institutions, Government owned Non-Banking Financial Companies (NBFCs), Investment Institutions, etc., for 5 five years from the date of full payment of the defrauded amount.
  • As per Master Circular on Wilful Defaulters dated July 01, 2015, no additional facilities should be granted by any bank / financial institution (FI) to the listed wilful defaulters. In addition, such companies (including their entrepreneurs / promoters) where banks / FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, FIs, NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of wilful defaulters.

What will be the prudential requirements for accounts subjected to compromise settlement or technical write-off?

  • Compromise settlements where the time for payment of the agreed settlement amount exceeds 3 months shall be treated as restructuring as defined in the Prudential framework on Resolution of Stressed Assets dated June 7, 2019.
  • In case of partial technical write-offs, the prudential requirements in respect of residual exposure, including provisioning and asset classification, shall be with reference to the original exposure.

What will be the legal implications of compromise settlements?

  • The compromise settlements with the borrowers shall be without prejudice to the provisions of any other statute in force.
  • Wherever recovery proceedings are pending before a judicial forum, any settlement arrived at with the borrower shall be subject to obtaining a consent decree from the concerned judicial authorities.

 

References

Reserve Bank of India. (2015, July 01). 'Master Circular on Wilful Defaulters'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9907

Reserve Bank of India. (2016, July 01). 'Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs (Updated as on July 03, 2017)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10477

Reserve Bank of India. (2023, June 20). 'FAQ - Framework for Compromise Settlements and Technical Write-offs'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=160

Reserve Bank of India. (2023, June 08). 'Framework for Compromise Settlements and Technical Write-offs'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12513&Mode=0


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