Banks seek clarification from RBI on compromise with defaulters

Banks have requested the Reserve Bank of India to clarify whether the latter’s recent guideline on compromise settlements applies to wilful defaulters and fraud accounts too, the Business Standard has reported. A few days ago, RBI had said that banks could accommodate defaulters with fresh loans after a ‘cooling off’ period of a year after a compromise settlement has been reached.

In that communication on June 8 the central bank had said that the boards of banks must be made a party to compromise settlements and technical write-offs and that the persons approving the settlements must be senior to those who sanctioned the loan in the first place.

The RBI guidelines said they applied to accounts labelled as wilful defaulters or fraud, without prejudice to the criminal proceedings underway against such debtors.

Banking officials pointed out that if an account is categorised as fraud or wilful defaulter, the tag sticks even if the company undergoes a change in management and the lender cannot simply wish away that tag.

They also said that if a new promoter comes into play and takes over the company, there is no logic why the entity should continue to labour under a fraud or wilful defaulter tag.

Banks have also requested the RBI to clarify on the way the value of a negotiated settlement is reached. According to current practice the lender usually determines the net present value of the security given for the loan and compare it with the amount arrived at during the negotiated settlement. The settlement most takes place through cash.
Lenders accept the settlement if the net present value of the security is lower than the settlement amount. The central bank has now directed the lenders to furnish details of the age and condition of the security.

Not satisfied with how the process is conducted right now, RBI has asked for more details of the asset and valuation. Banks usually ask an approved valuer to conduct a valuation of the asset given as collateral by the debtor.
Since compromise settlements need debt to be recast, banks that attempt such settlements need flexibility in approach.

The objective of the RBI was to ensure that assets do not remain locked up while simultaneously encouraging quick resolution of disputes, resolution of bad assets and increase in transparency in the operation of banks.
RBI has also asked banks to put in place a graded framework for staff accountability. But a banker told the newspaper that it would be unwise to disallow a compromise settlement if staff accountability is not completed. He argued that the two belong to different domains – staff accountability belongs to the disciplinary process while settlement is a financial process. The banker also argued that if settlement is made contingent upon staff accountability, many of the deals would not materialise and assets would remain stuck in expensive litigation.