Wilful defaulter norms in place since 2007: RBI
Mumbai, June 21, 2023
The RBI on Tuesday clarified that it has not made any relaxations for wilful defaulters as it sought to address the heat and dust raised over its recent circular on compromise settlements with such borrowers. The regulator, through frequently asked questions (FAQs), said that provision for such compromise settlements have been in place for over 15 years and its latest circular is aimed at tightening existing norms.
According to the FAQs, an RBI circular dated May 10, 2007 states that banks can enter into compromise settlements with such borrowers without affecting ongoing criminal proceedings. Its latest circular has emphasised that boards must approve all compromise settlements involving fraud or wilful defaulters.
The RBI added that its framework for stressed assets dated June 7, 2019 prohibits lenders from restructuring accounts of fraud or wilful defaulters, except in cases of change in ownership. Restructuring involves lenders maintaining an ongoing credit relationship with the borrower entity, which could pose a moral hazard in fraud or wilful default cases. On the other hand, compromise settlements result in a complete detachment of the lender from the borrower, enhancing prospects of recovery.
"From a public policy perspective, the primary regulatory objective is to provide lenders with multiple avenues for recovering defaulted funds promptly. Delays in resolving default cases not only result in time value loss but also lead to the deterioration of asset value, hampering ultimate recoveries," the RBI said. Allowing such exposures to remain unresolved on lenders' balance sheets due to legal proceedings would tie up funds in unproductive assets, which is undesirable, it said.
The FAQs also address the practice of technical write-offs. These refer to cases where non-performing assets (NPAs) remain outstanding at the borrower's loan account level but are derecognised by lenders for accounting purposes. This is a common banking practice used to cleanse balance sheets of bad debts considered unrecoverable or requiring disproportionate resources for recovery. However, technical write-offs do not waive the lenders' right to recover the amount, and defaulting borrowers remain legally obligated to repay their debts.
The RBI clarified that there are no relaxations in penal measures for defaulters. The directions still require defaulters to be barred from starting new ventures and obtaining institutional credit for five years after ceasing to be wilful defaulters. Additionally, borrowers classified as fraud are prohibited from accessing bank finance for five years from the date of full payment of the defrauded amount. The FAQs issued by the RBI state that borrowers classified as fraud or wilful defaulters cannot borrow fresh funds from lenders even after the cooling period of 12 months. The FAQs reference every RBI circular that has allowed settlement with wilful defaulters.
[The Times of India]
