The Reserve Bank of India (RBI) has allowed wilful defaulters and loans accounts involved in frauds to go in for a compromise settlement with banks to settle their dues.

Compromise Settlements:

Definition: A compromise settlement occurs when a borrower and a bank negotiate an agreement where the borrower offers to pay an amount lower than the total due on the loan.

Bank Acceptance: The bank agrees to accept this reduced amount as a full and final settlement.

Write-off/Waiver: As part of the settlement, the bank often writes off or waives a portion of the borrower’s dues, which happens only once.

Significant Approvals: In the past two decades, banks have approved numerous compromise settlements, amounting to hundreds of crores, with substantial reductions in loan amounts, resulting in significant losses for banks.

Haircut: A haircut refers to the reduction of outstanding payments or loans that borrowers will not repay.

Implications and Concerns:

Integrity of the Banking System: Compromise settlements may compromise the integrity of the banking system and hinder effective measures against deliberate defaulters.

Rewarding Unscrupulous Borrowers: Such settlements not only reward unscrupulous borrowers but also send a discouraging message to honest borrowers who fulfill their financial obligations.

Impact on Financial Stability: Wilful defaults have a significant impact on the financial stability of banks and the overall economy.

Condoning Wrongful Actions: Allowing defaulters to settle loans through compromise settlements can be seen as condoning their wrongful actions and burdening ordinary citizens with their misdeeds.

Importance of Debt Recovery:

Protecting Stakeholders: Debt recovery plays a crucial role in protecting the interests of depositors and other stakeholders.

Consequences of Non-Recovery: Failure to recover non-performing assets (NPAs) will ultimately lead to suffering for depositors and stakeholders.

Definition of NPA: An NPA refers to a loan or advance where the principal or interest payment has remained overdue for a period of 90 days.

Objective of Settlements: Any compromise settlement should aim to recover dues to the maximum extent possible, with minimal expenses and within the shortest timeframe.

Impact on Interest Rates: The high level of NPAs in the banking system is one of the reasons for elevated interest rates in India.

About Wilful Defaulter:

Ø  Wilful defaulters are entities that have the ability to repay money but intentionally fail to do so.

Ø  The concept of ‘Wilful Defaulter’ was introduced by the Reserve Bank of India (RBI) through its Master Circular, which defined the term and provided guidelines for banks and financial institutions to determine instances of wilful default.

Criteria for Wilful Default:

Ø  According to the RBI, a wilful default is deemed to have occurred in the following circumstances:

Ø  When there is a default in repayment obligations by a unit (company/individual) despite having the capacity to repay, indicating a deliberate intention not to repay the loan.

Ø  When funds obtained for a specific purpose are diverted for other uses.

Ø  When funds have been siphoned off and not utilized for the intended purpose, without any justifiable assets to account for the usage.

Ø  When assets purchased with lenders’ funds are sold off without the knowledge of the bank/lender.

Ø  In cases where group companies of wilfully defaulting units fail to honor guarantees or letters of comfort provided to lenders when invoked, such group companies are also considered wilful defaulters.