RBI’s circular on compromise settlements with wilful defaulters draws sharp criticism

The RBI on June 8 released rules by which banks may enter into compromise settlements with borrowers who have defaulted on loans. While the circular is mainly about how to arrive at compromise settlements with stressed borrowers, the provision related to allowing compromises with wilful defaulters has raised eyebrows and drawn the ire of bank employees' unions.

First a word on the non-wilful defaulters: Bankers say one-time settlements were permitted earlier as well, but the June 8 circular tightens existing rules. For instance, it says a banker who was in the committee that sanctioned the loan cannot be in the panel that designs the compromise proposal. Also the authority which gives final approval to a compromise settlement shall be one level higher in hierarchy than the one that designs the compromise package.

Most important, after the compromise amount is reached and paid and outstanding against the borrower hit zero, then the bank may consider a new loan to that borrower only after a minimum period of 12 months.

Bankers say such a circular was needed to quickly resolve loans since going through tribunal is time consuming, the assets(factories or businesses) lose value over time, the legal fees are high and there is a time value for the money which is not accounted for. Hence the need for quick compromises where banks are likely to recover more and recover quickly.

Now for the contentious part of the circular regarding wilful defaulters: the circular allows banks to reach compromise settlements with wilful defaulters, with a proviso that these shall not influence on going criminal or legal cases against the borrower which the bank may be pursuing. Also the board of the bank will have to approve every single case of compromise with a wilful defaulter.

The All India Bank officers and employees Unions have criticised this move to allow banks to make compromise settlements with borrowers declared as fraud and wilful defaulters saying this militates against the principles of justice and accountability. The Indian Express reporting this clause, added that such a wilful defaulter may be given a new loan after one year. CNBC-TV18 reached out to the RBI for comment and clarification, but RBI hasn't responded yet.

Bankers told CNBC-TV18 that the circular may have been misunderstood. A former central banker pointed out that there is a separate circular that states that no loan can be given to a wilful defaulter at least for five years, and even that only if he has cleared his entire previous loan. The five-year count will start after the loan is fully paid. This central banker said, Thursday’s circular only tightens this further by saying any settlement with a wilful defaulter has to be approved by the board in each case.

The chairman of another PSU bank pointed out that no banker will ever give a loan to a borrower termed wilful. “It is illogical to even expect it” he said. Another former bank MD agreed to this point and added that even boards will be very wary of approving a compromise settlement with a borrower termed wilful defaulter.

Refering to the non-wilful defaulter clauses, he said that the new circular was welcome given the safequards it brings in terms of forbidding the person who gave the loan from participating in structuring the compromise.

The new circular requires a bank’s board to lay down the process to be followed for compromise settlements such as specifying the minimum ageing needed before resorting to compromise. This is to prevent bankers from rushing to a compromise too quickly without pressuring the borrower. The board’s policies shall also put in place a framework for examination of staff accountability in such cases. The method of arriving at the realisable value of the collateral or the stressed asset shall also be laid down by the board.

The PSU bank chairman referred to earlier said these rules are meant to provide relief to genuine small borrowers who may be caught in unexpected events like Covid or global shortages etc. This wont make life easy for any wilful defaulter, he said. However at least one banker said he did get a call from an erstwhile NPA borrower asking if the cooling period may be applied in his case and if he can avail of a new loan. “This wasn’t a wilful defaulter,” the banker clarified.