Compromise Settlement for Wilful Defaulters

Context: The Reserve Bank of India (RBI) has allowed wilful defaulters and loans accounts involved in frauds to go in for a compromise settlement with banks to settle their dues. About Compromise Settlement:

• It refers to a negotiated settlement where a borrower offers to pay and the bank agrees to accept in full and final, settlement of its dues an amount less than the total amount due to them under the relative loan contract.
• It invariably involves a certain sacrifice by way of write off and/or waiver of a portion of its dues on a one-time basis.

RBI’s latest ‘Framework for compromise settlements:

• Banks can undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.
• The central bank has virtually reversed its earlier policy of keeping wilful defaulters out of compromise settlements.

Impacts of Compromise Settlement:

• Detrimental to the banking system and depositors: The wrongful actions of such defaulters and fraudsters are being condoned by placing the burden of their misdeeds on the shoulders of ordinary citizens, especially depositors.
• Moral hazard: Compromise settlement not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations.

Who are wilful defaulters?

• Reserve Bank of India’s classification: A ‘wilful default’ would be deemed to have occurred if the borrower has defaulted in meeting their repayment obligations to the lender even when they have the capacity to honour the said obligations.
• Current situation:
  1. There were 15,778 wilful default accounts involving an amount of Rs 340,570 crore as of December 2022.
  2. Public sector banks account for 85 per cent of the wilful defaults at Rs 292,666 crore.

• A wilful default happens when
  • The borrower has not utilised the finance from the lender for the specific purpose for which finance was availed, and has diverted the funds for other purposes,
  • Siphoned off funds,
  • Disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank.

News Source: Indian Express