The Reserve Bank of India’s (RBI) decision to allow wilful defaulters and loan accounts involved in frauds to enter into compromise settlements with banks has generated sharp criticism from several quarters, including bank unions.

Many bankers fear that the measure can lead to the birth of new defaulters, spoil credit discipline and hurt the integrity of the banking system. 

“While it may lead to an immediate increase in bad loan recoveries, the spine of the lending system will be hurt. It may lead to the birth of new defaulters,” a senior bank official said.

The reversal of the central bank’s earlier policy on wilful defaulters has indeed surprised many bankers who believe that a negotiated settlement of past dues would give a free pass to these borrowers and fraudsters. 

In 2019, the RBI’s directive to banks was to punish wilful defaulters and frauds. With a compromise settlement now being allowed, many bankers feel that it rewards unscrupulous borrowers.

As per the RBI, banks can undertake compromise settlements and technical write-offs with wilful defaulters. A wilful defaulter can also get a fresh bank loan, though after 12 months of making the compromise settlement.

A wilful defaulter is a borrower who refuses to repay loans despite having the capacity to pay up. This implies that the borrower has “diverted the funds for other purposes” or “has siphoned off the funds so that they are not available with the unit in the form of other assets” or has “disposed off or removed the movable fixed assets or immovable property” used as collateral.

As per the RBI, the regulated entities (REs)shall put in place board-approved policies for undertaking compromise settlements and technical write-offs. 

REs may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors, the RBI said.

Conditions would include minimum ageing, deterioration in collateral value etc, the RBI said in a notification.

Technical write-offs involve removing non-performing assets from the banks’ books without waiving the right of the bank to recover debt. 

Number of Wilful defaults

As of December 2022, there are 15,778 wilful default accounts involving an amount of Rs 340,570 crore. This compares with 14,206 accounts involving Rs 285,583 crore, as of December 2021 and 12,911 accounts for Rs 245,888 crore in December 2020, according to Transunion Cibil, a credit information company registered with the RBI.

State Bank of India (SBI) tops with 1,883 wilful default accounts for Rs 79,296 crore, followed by Punjab National Bank (PNB) at Rs 38,360 crore, Union Bank of India at Rs 35,266 crore, IDBI Bank at Rs 23,601 crore and Bank of Baroda at Rs 23,879 crore, according to data from Cibil website. 

Public sector banks account for 85% of the wilful defaults at Rs 292,666 crore.

Bank unions oppose RBI’s decision

Bank unions have urged the RBI to review and withdraw its decision to allow compromise settlements for wilful defaulters.

"It not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations," the All India Bank Officers' Confederation (AIBOC) and the All India Bank Employees' Association (AIBEA) said in a joint statement on social networking platform Twitter.

The compromise settlement for fraud accounts is an "affront" to the principles of justice and accountability, they said, adding that the RBI's move came as a "shocker."

By allowing such settlements, the RBI is condoning wilful defaulters' wrongful actions and placing the burden of misdeeds on bank employees, they said in the statement.