Rules of recovery

Settlement framework provides another option

Some bank unions are opposing the “Framework for Compromise Settlements and Technical Write-offs”, announced by the Reserve Bank of India (RBI) on June 8, and have termed it a detrimental step that can compromise the integrity of the banking system. According to the framework, regulated entities are expected to put in place board-approved policies for making compromise settlements with debtors as well as for technical write-offs. Compromise settlement in this context would mean a negotiated arrangement with the borrower to settle the claims of the lender in full, which may lead to a sacrifice of some amount due from the borrower. The technical write-offs for this purpose would mean non-performing outstanding loans at the borrower’s account level and those have been written off by the lender for accounting purposes.

The framework has given details on how lenders can proceed in settling such accounts. For instance, respective boards are expected to give specific guidance. They are also expected to put in place an accountability framework for the staff dealing with such cases. An official, for instance, who was involved in sanctioning the loan as an individual or as a member of a committee will not be part of this process. Settlement for wilful defaulters will require board approval in all cases. Compromise settlement for accounts classified as wilful defaulters or fraud is expected to be without prejudice to the ongoing criminal proceedings. Further, for borrowers benefiting from the compromise settlement, there would be a cooling period as determined by the boards of the lenders before fresh lending can be made to such entities.

Lenders are reportedly seeking clarification on lending to accounts that are classified as wilful defaulters or fraud. This is to be expected and the regulator should be able to clarify all doubts. However, fears expressed by bank employee unions seem exaggerated. Banks make a large number of lending decisions on an ongoing basis and some of those may go wrong even in the best of circumstances. In the case of businesses, things could go south because of a variety of factors, including unexpected changes in the macroeconomic environment, affecting the repaying capacity of borrowers. Banks often restructure the terms of loans in such cases. They also have the option of recovering loans through the Insolvency and Bankruptcy Code. The compromise settlement framework is another option and may be useful in settling relatively small loans, for example. There could be some discomfort in dealing with accounts classified as wilful defaulters or fraud. It would thus be important to proceed with care and transparency. The framework gives a fair bit of flexibility.

However, the most critical business aspect for lenders still remains lending standards. The asset quality in the banking system has improved significantly over the past few years and it would be important to preserve banking-sector stability. In this context, it is vital that banks constantly monitor loan accounts and report the true picture to all stakeholders. As Reserve Bank of India Governor Shaktikanta Das noted recently, the regulator has found innovative ways being used by banks to conceal stress. Banks are also said to be using new methods of ever-greening. Such practices tend to undermine the integrity and stability of the banking system as was witnessed over the last decade and must be avoided. Lenders must use all avenues made available to them for recovering as much as possible from non-performing accounts.