RBI issued Framework for Compromise Settlements and Loan Write-Offs

The Reserve Bank of India (RBI) released a framework for compromise settlements and technical write-offs. Regulated enterprises must implement board-approved practises for reaching compromise agreements with debtors and performing technical write-offs.

Compromise settlement refers to any negotiated arrangement with the borrower to fully pay the regulated entity’s claims against the borrower in cash. It may include some sacrifice of the amount owed by the borrower on the side of the regulated entity, with a commensurate waiver of the regulated entity’s claims against the borrower to that degree.

Regulated Entities must implement board-approved practises for reaching compromise agreements with borrowers and performing technical write-offs. Technical write-offs are cases in which non-performing assets remain outstanding at the loan account level of the borrower, but are written-off partially or completely by the regulated entity for accounting purposes only, without involving any waiver of claims against the borrower and without prejudice to the recovery of the same.

The board-approved policy should clearly lay out the process to be followed for all compromise settlements and technical write-offs, with particular advice on the required conditions precedent such as minimum ageing and collateral value degradation. The regulations must also include a graded structure for assessing staff accountability in such circumstances, with appropriate criteria and timescales set by the board.

Settlements or technical write-offs in respect of accounts classified as willful defaulters or fraud must be made without prejudice to the criminal proceedings against such debtors.

These instructions on operationalising the framework have been issued in exercise of the powers conferred by the Sections 21 and 35A of the Banking Regulation Act, 1949 read with Section 56 of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934 and Sections 30A, 32 and 33 of the National Housing Bank Act, 1987. They shall come into force with immediate effect and banks shall take necessary steps to ensure compliance with these instructions.