FRAMEWORK FOR COMPROMISE SETTLEMENTS AND TECHNICAL WRITE-OFFS

The Reserve Bank of India (RBI) has recently issued a circular dated 08.06.2023 for a framework for compromise settlements and technical write-offs with a view to providing further impetus to the resolution of stressed assets in the system as well as to rationalizing and harmonizing instructions across all regulated entities. The objective of this framework is to maximize possible recovery from distressed borrowers at a minimum expense in the best interest of Regulated entities (RE).

This circular is applicable to REs, which are Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks), Primary (Urban) Co-operative Banks, State Co-operative Banks, Central Co-operative Banks, All India Financial Institutions and Non-Banking Financial Companies (including Housing Finance Companies).

In terms of the said framework, REs are to put in place Board-approved policies for undertaking compromise settlements with borrowers as well as technical write-offs. The framework also allows REs to undertake compromise settlement or technical write-offs in respect of accounts categorized as wilful defaulters or fraud but without prejudice to criminal proceedings against such borrowers.

Compromise Settlement is defined under this framework as a ‘negotiated arrangement with borrower to fully settle the claims of REs against the borrower in cash’. The definition also states that the compromise settlement may result in some sacrifice of the amount due from a borrower on the part of REs with the corresponding waiver of claims of REs against the borrower.

While Technical write-off refers to writing off the non-performing assets outstanding at the borrower’s loan account for accounting purposes. This exercise does not include any waiver of claims, and no prejudice is caused to the recovery of the same. This means bad loans continue to be outstanding at the individual borrower’s level.

The Board-approved policies shall lay down a process for undertaking any compromise settlement and write-offs. Policies also lay down the permissible sacrifice for various categories of exposures while arriving at the settlement amount by computing the realizable value of the security.

The framework mandates that the Board-approved policies shall cover the delegation of powers for approval/sanction of compromise settlement and technical write offs which ordinarily rest with an authority at least one level higher in the hierarchy than authority vested with the power to sanction credit/investment exposure. Any official who was part of sanctioning of the loan shall not be part of the authority (individual or committee) approving the proposal for settlement or write-offs.

The borrowers are provided a cooling period of 12 months who were subject to compromise settlements before making fresh exposures to such borrowers. REs have the discretion to stipulate a higher cooling period in their policies.In case any RE initiates any recovery proceedings under a judicial forum against any borrower and the same is pending, this framework permits any settlement with the borrower subject to a consent decree obtained from such judicial forum