[Ananya is a student at Bharati Vidyapeeth New Law College, Pune.]
In a world of finance, the term 'wilful defaulters' has garnered significant attention and controversy in recent times. In a bid to tackle the persistent issue of wilful defaulters and fraudsters, the Reserve Bank of India (RBI) has recently introduced a groundbreaking provision that seeks to facilitates compromise settlements with these individuals or entities. The new directive by the RBI comes at a crucial juncture, as banks grapple with the complexities of an evolving economic landscape and mounting challenges posed by wilful defaulters and fraudsters. By providing banks with a structured framework for engaging in compromise settlements, RBI aims to expedite the recovery of distressed assets and reinvigorate confidence in the financial sector.
Now, who are wilful defaulters? An elusive figure cloaked in financial intrigue, a wilful defaulter is an individual or entity who, with intent and knowledge, chooses to defy their loan obligations, shattering the trust bestowed upon them by lenders. The term 'wilful defaulter' as defined by RBI in its Master Circular on Wilful Defaulters is a "person/company who has failed to make its loan payments even though it has the ability to do so; the person/company has not only failed to make loan payments but has also misused the borrowed funds for purposes other than what they were intended for; the person/company has not paid back its loan and has also sold or taken away the assets used as collateral for the loan without informing the bank or lender".
With the release of a notification by the RBI on 8 June 2023 titled as “Framework for Compromise Settlements and Technical Write-offs”, RBI has governed the board of the banks to go for a compromise settlement with the wilful defaulters and bank accounts declared as frauds and settle their dues giving a cooling-off period of 12 months to the defaulters. This new provision is not new as per the RBI officials. It is in existence for the last 15 years. The new circular has sparked intense debate among stakeholders, with diverging opinions on its merits and potential drawbacks. This blog tries to throw some light on all provisions of RBI regarding the issue and examines the aim with which the new notification has been introduced.
Provisions on Wilful Defaulters
The new notification directs the bank to enter into a compromise settlement with the wilful defaulters and frauds by giving them a cooling-off period of 12 months, but there has been a misunderstanding regarding RBI’s aim. In response, RBI released a document addressing frequently asked questions (FAQs) on 20 June 2023. In this informative document, RBI has clarified the confusion and responded by stating that the said provision which enable the banks to enter into a compromised settlement with the distressed account holders is not new. This provision has been a settled regulatory stance since last 15 years.
These instructions are already given to the banks. RBI advised IBA in 10 May 2007, that the banks can enter into a compromised settlement with wilful defaulters / fraudulent persons with continuous criminal proceedings. Also, the compromise settlement should be reviewed by the management committee / board of the banks. Under the Master Circular on Wilful Defaulters dated 1 July 2015, RBI expects that lenders may agree to settle with wilful defaulters, so it states that such cases do not need to be reported to credit information companies if the borrower has fully paid the compromised amount. Under the Master Directions on Frauds dated 1 July 2016, the RBI allows for compromise settlements with borrowers classified as frauds, but only if the agreement includes the condition that the criminal complaint against the fraudulent borrower will still proceed.
So, the main objective of this clarification was to put an end to the confusion created by bringing this fact in light that the new notification by the RBI is not actually new but an extended version of an existing instruction.
Aim of Maximizing Recovery
The main aim with which the recent circular regarding the compromise settlement of banks with wilful defaulters and frauds as issued by the Reserve Bank of India (RBI) is to maximize recovery from distressed assets. Recognizing the urgency to address the mounting burden of non-performing assets (NPAs) and expedite the resolution process, the RBI has emphasized the importance of striking a balance between recovery and resolution. The RBI's circular helps banks negotiate with wilful defaulters to recover distressed assets, minimizing financial impact, and improving liquidity. It emphasizes on due diligence, compliance, and transparency. By enabling structured settlements, it aligns with resolving NPAs and strengthening the banking sector.
The central bank has also specified certain condition for the said policy in order it is not misused and a proper procedure can be followed for granting the settlement. Such conditions include minimum ageing, deterioration in collateral value, etc. The rules must also set a mechanism for assessing employee accountability in such circumstances, with the board establishing clear criteria and timetables, the PTI report said.
Apart for such conditions, there were a few which were mentioned by the RBI in its notification which is available on their official website. These conditions are transparent, unambiguous and solution-oriented enabling the bank to act in a more customer-friendly way. By mentioning these conditions, the RBI has made the existing rules tighter. For every case of wilful default and fraud, the policy must be initially approved by the board. It is also to be seen that the person who was in the committee sanctioning the loan to the distressed asset should not be in the panel that structures the compromise. Also, all compromise settlements that have been given a green light must be ratified by an official one level higher than the one structuring the settlement. Apart from this, any case regarding a wilful defaulter or a fraud already in procession in front of the board must continue even after the compromise settlement policy, as per the board deem fit.
Some bankers are really impressed with the new policy and welcomed it with open arms. The renowned news channel CNBC-TV18 stated in their article that bankers told them that the circular has been misunderstood. A former central banker told them that there is a different circular that states that a wilful defaulter cannot be given any loan for at least 5 years and that too if his previous loans have been cleared.
This further gives the image that the bank is mainly focused on watching that misuse of any kind must not take place. Moreover, the policy makes sure that the rights of honest and reliable bank users must be safeguarded to prevent any unfair treatment or discrimination. The circular does not make life easy for any wilful defaulter. In fact, it paves a simpler way of recovering the loss amount by recovering as much amount as possible without wasting much of the time or resources. Some conditions mentioned in the circular which are to be followed by the bank’s board for compromise settlement such as specifying the minimum ageing needed before resorting to compromise helps in avoiding bankers from hastily agreeing to a compromise without putting undue pressure on the borrower.
Conclusion
By implementing the new policy, RBI has tried to bolster its earlier rules giving a more robust banking system. After studying the new RBI circular, it is undeniable that the new policy focuses on helping to control the defaulter situation because bankers prioritize maintaining the integrity of their institutions, making it highly unlikely for them to offer loans to known wilful defaulters or fraudsters.
The new policy clearly gives the idea of maximizing the possible recovery from a person termed as wilful defaulter or fraud with minimum expense. The bank aims that if not full, the maximum amount of such amount must be returned to the bank so that the burden does not falls on the bank. The policy provides a relief to genuine borrowers who might either be the victims of any unexpected event such as COVID-19, global shortages etc. or any instance of fraud committed against them.
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