RBI Simplifies Regulatory Norms for Compromise Settlements

The Reserve Bank of India (RBI) has issued instructions on ‘compromise settlements and technical write-offs’ to rationalize the regulatory guidance given to banks. The RBI has tightened some of the related provisions to ensure greater transparency. As per the RBI, the comprehensive regulatory framework governing compromise settlements and technical write-offs have covered all regulated entities. The central bank has issued FAQs (Frequently Asked Questions) related to the June 8 circular. Bank unions AIBOC and AIBEA have opposed the Reserve Bank’s move to allow lenders to settle loans of wilful defaulters under compromise settlement. As per RBI’s FAQs, the provision enabling banks to enter into compromise settlements in respect of borrowers categorized as fraud or wilful defaulter is not a new regulatory instruction and has been the settled regulatory stance for more than 15 years. The circular introduces the concept of a cooling period for normal cases of compromise settlement during which the lender undertaking settlement shall not take any fresh exposure on the borrower entity. RBI added that it provides clarity on the definition of technical write-offs and provides broad guidance on the process to be followed by the regulated entities for technical write-offs, which is a normal banking practice. RBI warns that restructuring in general entails the lenders having a continuing exposure to the borrower entity even after restructuring. Hence, in case of borrowers classified as fraud or wilful defaulters, permitting lenders to continue their credit relationship with the borrower entity would be fraught with moral hazard. On the other hand, a compromise settlement entails a complete detachment of the lender with the borrower. Therefore, permitting lenders to settle with the borrowers as per their commercial judgement would enhance recovery prospects.