Page 44 - BANKING FINANCE NOVEMBER 2023

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Compromise Settlements and Technical Write-offs" on June as decided by the Boards of the institutions. A compromise
8. The Prudential Framework for Resolution of Stressed settlement would refer to an agreement reached with the
Assets, which was released exactly four years ago, was borrower to fully resolve the lender's claims, which would
followed by the release of this framework, which tries to necessitate the sacrifice of some amount owed by the
harmonise and rationalise the preceding guidelines. borrower.

There is a clause in the said framework which states that Some bank unions disagree with it and have called it a
accounts flagged as fraudulent or wilful defaulters are also harmful move that could jeopardise the stability of the
eligible for compromise settlement under the Framework, banking system. The RBI decision could be harmful to the
provided the proposals for such settlements are approved banking sector and depositors, since defaulters and
by the Board of the REs (Regulated Entities), is perhaps the fraudsters are being excused for their wrongdoings, which
most intriguing and, as expected, it did spark widespread will fall disproportionately on ordinary people, especially
criticism. The extant guidelines say -"REs may undertake depositors. It promotes dishonest borrowers while also
compromise settlements or technical write-offs in respect sending an unpleasant message to honourable borrowers
of accounts categorised as wilful defaulters or fraud without who make an effort to fulfil their financial responsibilities.
prejudice to the criminal proceeding underway against such The RBI's most recent "Framework for Compromise
debtors." Settlements and Technical Write-Offs" is viewed as a
negative move that could destabilize financial sector and
The framework has provided information on how lenders can undercut efforts to effectively deal with wilful defaulters.
handle the settlement of these accounts. For instance,
explicit guidance is expected from the relevant boards. They According to reports, lenders want more information about
must also set up a system of accountability for the personnel lending to accounts that have been classified as wilful
handling these instances. An official, for instance, who defaulters or fraudulent. This is to be anticipated, and the
participated in the loan's sanctioning as an individual or as regulator ought to be ready to dispel any questions. The
a committee member won't be participating in this worries voiced by bank staff unions, meanwhile, are
procedure. In all circumstances, board approval is required overstated. Banks regularly make a lot of lending decisions,
before any settlement for wilful defaulters. and even under the best of circumstances, some of them
may be flawed.
It is anticipated that any compromise agreements for
accounts labelled as fraud or wilful defaulters will not affect Businesses may experience difficulties due to a variety of
current criminal investigations. In addition, there would be circumstances, such as unanticipated changes in the
a cooling-off period before new loans could be issued to macroeconomic climate that may have an impact on
borrowers who benefited from the compromise settlement, borrowers' capacity to repay loans. In such circumstances,
banks frequently alter the conditions of loans. The Insolvency
and Bankruptcy Code is another possibility for them to
recoup loans. Another choice is the compromise settlement
framework, which could be helpful, for instance, in settling
relatively minor loans. Dealing with accounts labelled as
deliberate defaulters or fraud may cause considerable stress.
Therefore, it would be crucial to move forward cautiously
and openly. The structure allows for a good deal of flexibility.

There may be specific approaches to deal with this
precarious situation of addressing wilful defaulters like in
order to examine, analyse, and ultimately forecast wilful
defaults public sector bank may appoint a specialised

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