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?
- 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.
Analysis
- 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.
