FAQ on ‘Framework for Compromise Settlements and Technical Write-offs’

RBI has issued FAQ on Circular dated June 8, 2023 on ‘Framework for Compromise Settlements and Technical Write-offs’. The circular is intended to achieve the following objectives:

1. It rationalizes the existing regulatory guidance to banks on compromise settlements, consolidating various instructions issued over the years. It also tightens some of the related provisions and ensures greater transparency.
2. 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.
3. It provides clarity on definition of technical write-off and provides a broad guidance on the process to be followed by the regulated entities for technical write-offs, which is a normal banking practice.
4. As a disincentive to both the lenders and the borrowers, it introduces the concept of cooling period for normal cases of compromise settlement during which the lender undertaking settlement shall not take any fresh exposure on the borrower entity. In case of borrower accounts classified as wilful defaulter or fraud, the debarment to obtain fresh finance, as explained at (2) above, will apply.

The FAQs clarifies the following:

1.The prudential guidelines provide sufficient safeguards with regard to compromise 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 wilful 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, wilful defaulter and quick mortality accounts.

2. The provision enabling banks to enter into compromise settlement in respect of borrowers categorised as fraud or wilful defaulter is not a new regulatory instruction and has been the settled regulatory stance for more than 15 years. 

3. The penal measures currently applicable to borrowers classified as fraud or wilful defaulter in terms of the Master Directions on Frauds dated July 1, 2016 and the Master Circular on Wilful Defaulters dated July 1, 2015, respectively, remain unchanged and shall continue to be applicable in cases where the banks enter into compromise settlement with such borrowers.

4. The cooling period has been introduced as a general prescription for normal cases of compromise settlements, without prejudice to the penal measures applicable in respect of borrowers classified as fraud or wilful defaulter as per the Master Directions on Frauds dated July 1, 2016 and the Master Circular on Wilful Defaulters dated July 1, 2015.

5. Technical write-offs do not entail any waiver of claims against the borrower and thus the lenders’ right to recovery is not undermined in any manner. Therefore, the defaulting borrowers are not benefited in any manner and their legal obligation as well as the costs of such defaults for them remain unchanged vis-à-vis the position prior to technical write-offs.