RBI Allows Compromise Settlement with Wilful Defaulters, Fraud Accounts

Context: Banks can take on compromise settlements on accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.

What is a Compromise Settlement?

image 75
  • A compromise settlement with the borrowers is negotiated by the bank with or without involving remission or sacrifices.
  • Recovery of debts due to banks is an important activity that aims at protecting the interest of the depositors and other stakeholders. If banks do not recover NPAs, depositors and other stakeholders will ultimately suffer.
  • Hence, any compromise settlement should have an underlying objective of recovery of dues to the maximum extent possible at minimum expense and within the shortest possible time frame.

About RBI Circular

  • RBI has allowed banks to enter into a compromise settlement for accounts termed as wilful defaulters and fraud. A wilful defaulter is a borrower who refuses to repay loans despite having the capacity to pay up.
  • Cooling off period: A wilful defaulter or a company involved in fraud can apply for new loans after at least 12 months of executing a compromise settlement. However, a regulated entity (banks and finance companies) are free to stipulate higher cooling periods as per their board-approved policies. 


  • Reduction in NPAs: Write-offs, or bad loans taken out from the NPA books for accounting and tax purposes, were used by banks to show lower non-performing assets (NPAs). In the last ten years, the reduction in NPAs due to write-offs was Rs 13,22,309 crore.
  • Early Recovery & Cost Savings: Such settlement ensures early recovery of dues and results in saving of cost to the bank in terms of legal expenses and other costs.
  • May lead to a tricky situation: Possibility that more public money will be lost in the process.
  • Misuse: Banks and corporates often misuse restructuring for evergreening problem accounts to keep reported NPA levels low.

PYQ 2017:

Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news?

(a) It is a procedure for considering ecological costs of developmental schemes formulated by the Government.

(b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.

(c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.

(d) It is an important provision in The Insolvency and Bankruptcy Code’ recently implemented by the Government.

Scroll down for answer









Answer: (b)

Leave a Reply

Your email address will not be published. Required fields are marked *

The maximum upload file size: 20 MB. You can upload: image, document, archive, other. Drop files here

Online Counselling
Table of Contents
Today's Current Affairs
This is default text for notification bar