Mudra Compass

The Reserve Bank of India has issued various instructions to regulated entities (REs) regarding compromise settlements in respect of stressed accounts from time to time. The provisions of this framework shall apply to all REs to which this circular is addressed and shall be without prejudice to the provisions of the Prudential Framework, or any other guidelines applicable to the REs on resolution of stressed assets.

As per the circular, “Compromise settlement for this purpose shall refer to any negotiated arrangement with the borrower to fully settle the claims of the RE against the borrower in cash; it may entail some sacrifice of the amount due from the borrower on the part of the REs with a corresponding waiver of claims of the RE against the borrower to that extent.”

“Technical write-off for this purpose shall refer to cases where the non-performing assets remain outstanding at borrowers’ loan account level, but are written-off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.”

In respect of compromise settlements, it shall be ensured that:

(i) delegation of power for such approvals rests with an authority (individual or committee, as the case may be) that is at least one level higher in the hierarchy than the authority vested with the power to sanction the credit/investment exposure.

(ii) proposals for compromise settlements in respect of debtors classified as fraud or willful defaulter, as permitted in terms of clause 13 of this Annex, shall require approval of the Board in all cases.

Furthermore, the circular stated that Compromise settlements where the time for payment of the agreed settlement amount exceeds three months shall be treated as restructuring as defined in terms of the Prudential framework on Resolution of Stressed Assets dated June 7, 2019.

The circular has mentioned guidelines in case of partial technical write-offs, the prudential requirements in respect of residual exposure, including provisioning and asset classification, shall be concerning the original exposure by providing that the amount of provision including the amount representing partial technical write-off shall meet the extant provisioning requirements, as computed on the gross value of the asset.

The RBI in its circular also carried out reporting instructions while handling compromise settlements and technical write-offs, there shall be a reporting mechanism to the next higher authority, at least quarterly, concerning compromise settlements and technical write-offs approved by a particular authority. Compromise settlements and technical write-offs approved by the MD & CEO / Board Level Committee would be reported to the Board.

In respect of borrowers subject to compromise settlements, there shall be a cooling period as determined by the respective Board approved policies before the REs can assume fresh exposures to such borrowers.

Provided that:

(i) The cooling period in respect of exposures other than farm credit exposures shall be subject to a floor of 12 months. REs are free to stipulate higher cooling periods in terms of their Board approved policies.

(ii) The cooling period for farm credit exposures shall be determined by the REs as per their respective Board approved policies.

The RBI has issued a comprehensive regulatory framework governing compromise settlements and technical write-offs covering all regulated entities as a part of the bi-monthly monetary policy.

Additionally, the RBI has mandated a suitable reporting format covering the following aspects at the minimum:

(i) trend in the number of accounts and amounts subjected to compromise settlement and/or technical write-off (q-o-q and y-o-y);

(ii) out of (i) above, the separate breakup of accounts classified as fraud, red-Flagged, willful default, and quick mortality accounts;

(iii) amount-wise, sanctioning authority-wise, and business segment / asset-class-wise grouping of such accounts;

(iv) the extent of recovery in technically written-off accounts.

The RBI also published FAQs on the compromise settlements and technical write-offs to clarify that there is no new clause permitting lenders to enter into compromise settlements with borrowers classified as fraud or willful default.

“The said provision enabling banks to enter into compromise settlement in respect of borrowers categorized as fraud or willful defaulter is nota new regulatory instruction and has been the settled regulatory stance for more than 15 years,” The FAQs mentioned.

The FAQs circular clarified that the penal measures currently applicable to borrowers classified as fraud or willful defaulter and there is no dilution of it.

Further, it states that Compromise settlement is not available to borrowers as a matter of right; rather it is discretion to be exercised by the lenders based on their commercial judgment.

The prudential guidelines provide sufficient safeguards about such settlements considered by the lenders:

• All such decisions are required to be taken by lenders as per their Board approved policies, instead of adopting an ad-hoc approach in each case;
• The circular further strengthens the regulatory guidance by mandating that all such cases of compromise settlement involving borrowers classified as fraud or willful defaulter must be approved by the Board;
• Such settlements shall be without prejudice to the criminal proceeding underway or to be initiated, if under consideration of the lenders against such borrowers;
• As already mentioned, the extant penal provisions continue to remain applicable in such cases.
• Wherever recovery proceedings are pending before a judicial forum, any settlement arrived at with the borrower shall be subject to obtaining a consent decree from the concerned judicial authorities.
• The Boards of lenders have been entrusted with the oversight of the overall trends in approvals of all compromise settlements, including specifically the breakup of accounts classified as fraud, red-flagged, willful defaulter, and quick mortality accounts.

The circular is intended to achieve the following objective by providing a clear regulatory framework; it enables other regulated entities, particularly cooperative banks, to undertake compromise settlements as part of the normal resolution efforts.

(Source – RBI Circular and FAQs)