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Wilful defaulter norms in place since 2007: RBI

In an effort to calm concerns voiced in relation to its most recent circular on compromise settlements with such borrowers, the RBI emphasized on Tuesday that it has not made any accommodations for wilful defaulters. The regulator claimed in its frequently asked questions (FAQs) that such compromise settlement provisions have been in existence for over 15 years and that its most recent circular is intended to tighten already-existing standards.

The FAQs clarify that banks can reach compromise agreements with such borrowers without harming current criminal investigations, in accordance with an RBI circular of May 10, 2007. In its most recent circular, it highlighted that all compromise agreements involving fraud or wilful defaulters require board approval.

Also read, HC stays bank action under RBI’s master circular till September 11.

Further Statement from RBI:

The RBI further stated that, save in circumstances of change in ownership, lenders are not permitted to restructure accounts of fraud or wilful defaulters under its framework for stressed assets of June 7, 2019. Restructuring requires lenders to continue their credit connection with the borrower firm, which could present a moral hazard in situations of fraud or willful default. Contrarily, compromise agreements completely separate the lender from the borrower, improving the chances of repayment.

“From a public policy standpoint, the main regulation goal is to give lenders a variety of options for quickly recouping money that have been late. Delays in handling default cases impair eventual recovery by increasing asset value and causing time value loss, according to the RBI.

The FAQs include the procedure of technical write-offs as well. These refer to situations where non-performing assets (NPAs) are still present at the loan account level for the borrower but have been removed from the books by the lender. This is a standard banking procedure used to remove bad debts from balance sheets that are deemed uncollectible or would need disproportionate resources to recover. Technical write-offs, nevertheless, do not relieve lenders of their obligation to recoup the money; failing borrowers are still required by law to pay back their loans.

The RBI made it clear that the sanctions for defaulters are unchanged. The directives nevertheless state that defaulters must wait five years after ceasing to be willful defaulters before launching new businesses or applying for institutional loans.

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