RBI Allows Lenders to Settle Loans of Wilful Defaulters Under Compromise Settlement

A wilful defaulter can get a new loan after 12 months of executing a compromise settlement. However, concerns have been raised that it can lead to a tricky situation, wherein there’s a possibility that more public money will be lost in the process.

The Wire Staff

rbi allows lenders to settle loans of wilful defaulters under compromise settlement

Office of the Reserve Bank of India. Credit: PTI

New Delhi: The Reserve Bank of India (RBI) has allowed banks and finance companies to settle loans of accounts classified as 'wilful defaulters' by entering into compromise settlements or technically writing off the loans.

The settlements made will be without prejudice to the criminal proceedings against the borrower, the RBI said in its circular released on June 8.

Compromise settlement refers to any negotiated arrangement with the borrower to fully settle the claims of the regulated entity against the borrower in cash. It may entail some sacrifice of the amount due from the borrower on the part of the regulated entity with corresponding waiver of claims of the regulated entity against the borrower to that extent.

Technical write-offs involve removing non-performing assets from the banks' books without waiving the right of the bank to recover debt. In short, the bad loan continues to be outstanding at the individual borrower's level.

The central bank said that the regulated entities shall put in place board-approved policies for undertaking compromise settlements and technical write-offs.

The RBI also directed banks to have a minimum cooling period of at least 12 months before making fresh exposures to borrowers who had undergone compromise settlements. This means that a wilful defaulter can get a new loan after 12 months of executing a compromise settlement, the Indian Express reported.

“RBI nod for compromise settlement for wilful defaulters and fraud companies can lead to a tricky situation. There’s a possibility that more public money will be lost in the process. A wilful defaulter is a borrower who refuses to repay loans despite having the capacity to pay up,” an official of a bank told the newspaper.

The responsibility of deciding on compromise settlements has been passed on to the board of directors of the lending banks, the Times of India reported.

This article went live on June twelfth, two thousand twenty three, at forty-five minutes past twelve at noon.

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