Wilful defaulters may get loan after five years of compromise settlement

Debt restructuring to be allowed only if promoter changes

Banks will be allowed to extend loans to wilful borrowers and defaulters after five years of a compromise settlement and debt restructuring will be allowed only if there is change in promoters, sources aware of the development said.

On June 8, the Reserve Bank of India (RBI) had issued a circular on compromise settlement with borrowers, including wilful defaulters and fraud accounts. The regulator mandated a board approved policy for compromise settlements, and proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulters would require approval of the board in all cases.

In May 2007, sources pointed out, the RBI had advised through a letter to the Indian Banks’ Association that the lenders might enter into compromise settlement with wilful defaulters/fraudulent borrowers without prejudice to the criminal proceeding underway against such borrowers. Such cases have to be vetted by the management committee of the Board or the Board.

 

The same letter barred wilful defaulters and fraudulent borrowers from institutional finance for five years – a norm that remained unchanged, the sources said.

The sources also said the resolution framework issued by the RBI in June 2019 — barring restructuring of accounts of wilful defaulters and fraud accounts unless there was a change in promoter — was also applicable in the context of compromise settlement.

“The provision to permit compromise settlement in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway, has been an established regulatory stance for more than 15 years,” the sources said, adding that such a move help maximise the recovery prospects for regulated entities, without any compromise on pursuing the legal proceedings.

Commenting on the criticism of employees’ union on compromise settlement with wilful defaulters, the sources said the recent norms merely rationalises the existing regulatory guidance on compromise settlements, consolidating various instructions issued in the past.

The RBI had clarified in the June 8 circular that compromise settlement in respect of accounts categorised as wilful defaulters or fraud, without prejudice to the criminal proceeding underway against such debtors.

TIMELINE

• On June 8, the RBI had issued a circular on compromise settlement with borrowers, including wilful defaulters and fraud accounts
• RBI mandated a board-approved policy for compromise settlements
• Proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulters would require approval of the board in all cases
• Resolution framework issued by the RBI in June 2019 was also applicable in the context of compromise settlement