Clipped from: https://www.thehindubusinessline.com/opinion/editorial/rbis-compromise-settlement-norms-above-board/article66990403.ece
The central bank could have cleared the air by issuing the FAQs earlier
The Reserve Bank of India’s recently issued ‘compromise settlement’ norms have kicked up a lot of heat and dust. The Opposition and other critics have lost no time in saying that the RBI is letting ‘wilful defaulters’ off the hook by allowing banks to strike a deal with them. The RBI’s directive does not bear this out at all. Its FAQs on the June 8 circular, released on Tuesday, make this amply clear. However, the RBI could have warded off a misinformed debate on this subject by issuing its FAQs a few days earlier. It should improve its communication skills, by being clear in its prose and open to clearing doubts.
It could, for instance, have clarified in its June 8 circular (without waiting to do it in its FAQs) that compromise settlement is no ‘sell-out’ to wilful defaulters or fraudsters but has always been around with proper safeguards in place. Wilful defaulters (those who can pay but do not, or have used their funds for purposes other than spelt out) were never excluded from any settlement. But the important point here, conveniently overlooked by critics and reiterated in the FAQs, is that such deals will not scuttle criminal proceedings against these defaulters or fraudsters (those who misrepresent documents to get loans). The FAQs make a crucial clarification that a ‘cooling period’ of just one year for settled dues does not apply to wilful defaulters, who will have to sit out for five years before being eligible for credit. Surely, there is no harm in banks securing decent money upfront from accounts faced with a bleak future.
Broadly speaking, the RBI expects a bank to settle (restructure the loan or strike a compromise) with a borrower within 180-270 days of the loan being declared an NPA (which is after 90 days of default). After this, banks are expected take the entity to the National Company Law Tribunal for IBC-led resolution. In this post-NPA period, a bank can ‘technically write off’ a loan from its books, which means that it surmises poor chances of recovery at the outset and does a full provisioning upfront before taking the loan off its books – even as the loan remains recoverable from the borrower’s point of view. Else, a bank can work out a settlement with the borrower, which will save time and save costs of legal proceedings – with higher recoveries vis-a-vis the latter. To ensure that such deals are above suspicion, the June 8 circular says that the authority supervising the settlement should be “at least one level higher in hierarchy” than the one sanctioning the loan. No member can be common to both set-ups.
However, the RBI should relook at the provision on wilful default that penalises misutilisation of funds. Globally, lenders do not monitor funds end-use in this way, as it shackles businesses. The issue of banks declaring wilful defaulters and fraudsters as such on time remains, and this impacts recoveries. But that’s a separate line of inquiry.
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