RBI on June 08, 2023 has issued a Framework for Compromise Settlements and Technical Write-offs for finance companies in furtherance of directions provided in the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019.
The Prudential Framework for Resolution of Stressed Assets dated June 7, 2019 provides a broad principle-based framework. With a view to provide further impetus to the same, as well as to harmonize the instructions across all regulated entities, Statement on Developmental and Regulatory Policies dated June 08, 2023 has proposed to Issue a comprehensive regulatory framework governing compromise settlements and technical write-offs covering all regulated entities.
Board approved policy
The framework mandated Regulated Entities (REs) to put in place Board-approved policies for undertaking compromise settlements with the borrowers as well as for technical write-offs. The Board approved policy shall comprehensively lay down the process to be followed for all compromise settlements and technical write-offs, with specific guidance on the necessary conditions precedent such as minimum ageing, deterioration in collateral value etc.
The policies shall also put in place a graded framework for examination of staff accountability in such cases with reasonable thresholds and timelines as may be decided by the Board. The policy shall also cover the delegation of powers for approval/sanction of compromise settlements and technical write-offs.
Delegation of power for such approvals shall rest with an authority (individual or committee, as the case may be) which is at least one level higher in hierarchy than the authority vested with power to sanction the credit / investment exposure.
The Board shall mandate a suitable reporting format so as to ensure adequate coverage of the following aspects at the minimum: (i) trend in 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, separate breakup of accounts classified as fraud, red-Flagged, wilful default and quick mortality accounts; (iii) amount-wise, sanctioning authority-wise, and business segment / asset-class wise grouping of such accounts; (iv) extent of recovery in technically written-off accounts.
There shall be a reporting mechanism to the next higher authority, at least on a quarterly basis, with respect to 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.
Treatment of accounts categorized as fraud and wilful defaulter
REs may undertake compromise settlements or technical write-offs in respect of accounts categorized as willful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.