On June 8, 2023, the Reserve Bank of India (RBI) issued a regulatory framework for governing compromise settlements and technical write-offs.
As per reports, Banks had over 15,000 wilful default accounts amounting to Rs. 340,570 crores as of December 2022. Such distressing circumstances have previously been highlighted by the RBI in its routine circulars. In June 2019, it released the Prudential Framework for Resolution of Stressed Assets which recognized settlements as a valid resolution plan. In a similar vein, the RBI has now introduced a framework to make banks better equipped and more accountable in dealing with cases of fraud and willful defaults.
According to the framework, compromise settlements entered into by Regulated Entities (RE) with borrowers have to comply with the policies approved by the Board. Further, the policy would mention the process to be followed in such cases and how the settlement amount would be arrived at after considering the realisable value of the security. With this, it is sought to “maximise the possible recovery from a distressed borrower at minimum expense, in the best interest of the RE”.
It is specified that with respect to accounts categorised as wilful defaulters or fraud, the REs may undertake compromise settlements or technical write-offs without prejudice to the criminal proceeding pending against such debtors. The framework also provides for quarterly reporting, cooling periods, etc.