The Reserve Bank of India (RBI) recently issued a circular allowing wilful defaulters and entities involved in fraudulent activities to opt for compromise settlements or technical write-offs. This decision has sparked controversy and raised questions about its potential impact on the banking industry and the economy. Let’s understand the intricacies of this recent development.
Understanding the New Circular
The new RBI circular permits banks and financial institutions to negotiate compromise settlements or technical write-offs for accounts labelled as wilful defaulters or fraudulent, irrespective of any ongoing criminal proceedings against the defaulting entities. Additionally, the bank is required to impose a minimum cooling period of 12 months before sanctioning fresh loans to borrowers who have availed compromise settlements.
Major Concerns Around the Circular
This recent move by the RBI has raised several concerns, primarily regarding the possible loss of public money. There have been instances where compromise settlements have led to significant losses for banks due to substantial haircuts on outstanding payments. Further, there are apprehensions that allowing compromise settlements might stimulate big fraudsters and defaulters.
Dealing with Debt Recovery Tribunals (DRTs)
The role of Debt Recovery Tribunals (DRTs) is also under the scanner. There have been instances where banks opted for compromise settlements without informing the DRTs. This practice undermines the importance of both Asset Reconstruction Companies and the Insolvency and Bankruptcy Code (IBC).
The Advantages of Compromise Settlements
Despite concerns, compromise settlements do have certain advantages. They enable early recovery of dues and save costs for banks by reducing legal expenses and other associated costs. Technical write-offs also help banks reduce non-performing assets (NPAs), resulting in lower reported NPA levels.
Understanding Non-Performing Assets (NPA)
Non-Performing Assets (NPAs) refers to loans or advances that are in default or are in arrears on scheduled payments of principal or interest. For agricultural loans, if the principle and interest are not paid for two cropping seasons, the loan is considered as NPA.
Laws and Regulations Related to NPAs
India has several laws and regulations to deal with NPAs. These include the SARFAESI Act, 2002, the Insolvency and Bankruptcy Code (IBC), 2016, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and others. The Bad Bank in India, officially known as the National Asset Reconstruction Ltd (NARC), also plays a crucial role in managing bad loans.
Identifying Wilful Defaulters
The term “wilful defaulter” is used for borrowers who have the capacity to honour their loan obligations but deliberately choose not to. In some cases, the borrowed funds are diverted for a purpose other than what was originally agreed upon in the loan agreement.
Towards A Better Recovery Process
For a better recovery process, banks must consider ongoing recovery proceedings under judicial forums while negotiating compromise settlements. It is critical that compromise settlements prioritize the maximum recovery of dues with minimal expense and take into account the interests of the tax-paying public.
This discussion offers an overview of the recent RBI circular and its implications for the banking industry. The potential benefits and concerns related to this move need to be closely watched in the coming months to understand its full impact.