The Reserve Bank of India (RBI) has clarified that a compromise settlement with wilful defaulters is nothing new and has existed for more than 15 years. The latest circular only aims at tightening existing norms.

The RBI, through frequently asked questions (FAQs), said that a circular dated 10 May 2007 states that banks may enter into compromise settlement with wilful defaulters/ fraudulent borrowers without affecting criminal proceedings.

 In the latest circular dated 8 June 2023, the RBI has emphasised that boards must approve all compromise settlements involving fraud or wilful defaulters.

The FAQ further said there has been no change in the penal measures on wilful defaulters. Directions in this regard were issued on July 2015 and July 2016. The penal measures “shall continue to be applicable in cases where the banks enter into compromise settlement with such borrowers”.

 The RBI said that such borrowers get debarred from fresh institutional for floating new ventures for five years from the date of removal of their name from the list of wilful defaulters.

Moreover, borrowers who are classified as fraud are debarred from availing bank finance for five years from the date of full payment of the defrauded amount.

 Regarding the minimum cooling period of 12 months, the RBI clarified that borrowers classified as fraud or wilful defaulters will not be able to borrow fresh funds from the lenders after the cooling period.

The RBI has listed a set of prudential guidelines to ensure greater transparency and provide sufficient safeguards with regard to such settlements considered by the lenders. “Compromise settlement is not available to borrowers as a matter of right; rather it is a discretion to be exercised by the lenders based on their commercial judgement,” RBI said.

 The FAQs said the standard practice of loan restructuring entails the lenders having a continuing exposure to the borrower entity even after restructuring and hence, in case of borrowers classified as fraud or wilful defaulters, permitting lenders to continue their credit relationship with the borrower entity would be fraught with moral hazard.

 A compromise settlement, on the other hand, entails a complete detachment of the lender with the borrower. Therefore, permitting lenders to settle with the borrowers as per their commercial judgement would enhance recovery prospects.