Compromise settlement is not available to borrowers as a matter of right: RBI

The Reserve Bank of India (RBI) filled in gaps of interpretation in its recent circular on “Technical Settlement and Write-offs Framework”, clarifying “Penalty Procedures” and “Minimum Cooling Period”, among others, through its frequently asked questions.

It comes on the heels of bank associations objecting to a provision in the circular that would allow bank boards to accept proposals for settlement settlements with respect to debtors classified as fraudulent or in default.

The Central Bank confirmed that the compromise settlement is not available to borrowers as a right; Rather, it is an estimate that lenders exercise based on their commercial judgment.

The RBI said the rationale for allowing lenders to enter into settlement settlement with borrowers classified as fraudulent or in default is to enable multiple ways for lenders to recover the defaulted funds without much delay. Aside from losing time value, excessive delays deteriorate the value of assets, hindering eventual recoveries.

The Central Bank emphasized that the punitive measures currently applicable to borrowers classified as fraudulent or willful default in terms of the Master Directives on Fraud (1 July 2016) and the Master Circular on Defaulters (1 July 2015), respectively, have not changed.

These measures shall remain in force in cases where banks enter into a compromise with these borrowers.

Such punitive measures entail, inter alia, that no additional facilities be granted by any bank or financial institution to borrowers listed as willful defaulters, and that these companies (including entrepreneurs or promoters) be denied institutional financing to float new projects for a period Five years from the date of their names being removed from the list of defaulters.

In addition, borrowers classified as fraud are denied access to bank financing for a period of five years from the date of full payment of the fraudulent amount.

cooling period

The RBI said the cooling-off period (subject to a minimum of 12 months before controlled entities can assume new exposures to such borrowers) has been given as a general description for normal cases of intermediate settlements, without prejudice to the punitive measures applicable in respect of rated borrowers. As fraud or willful default as previously mentioned.