Page 28 - Banking Finance October 2023

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should keep the matter confidential. And, even after write-
off, recovery efforts should continue. The concerned NPA is
removed from the bank's books but a shadow loan account
is created to pursue loan recovery though it is written off.
Thereafter, there will be no need to make provisions against
it. To the extent of loan write off, the tax liability will also
come down as the written off amount is reduced from the
profit. The writing off NPAs is a regular exercise carried by
banks to clean up the balance sheet. Further, the write-off,
at times, shall be a viable business strategy in respect of
wilful defaulters who may spoil the credit culture of society.

Regulatory Aspects of Loan Compromise
of the banks in the form of waiver of part of the claims from
and Write Off: the borrower.

In 2003, RBI asked all public sector banks (PBSs) to uniformly
implement guidelines for compromise settlements from The Board approved policy shall inter alia should contain
NPAs in all sectors irrespective of the nature of business, provisions relating to permissible sacrifice for various
which have become doubtful or loss and, those NPAs categories of exposures while arriving at the settlement
classified as sub-standard which have subsequently become amount and after prudently reckoning the current realisable
doubtful or loss with outstanding balance up to Rs. 10 crore value of security/collateral, if available. The methodology
(1). In addition, cases on which the banks had initiated for arriving at the realisable value of the security shall also
action under the Securitisation and Reconstruction of form part of the Board approved policy whose objective
Financial Assets and Enforcement of Security Interest should be to maximise the possible recovery from a
(SARFAE) Act, 2002 and also those cases pending before distressed borrower at minimum expense and in the best
Court / Debt Recovery Tribunal /Board for Industrial Finance interest of the bank.
and Reconstruction , subject to the consent decree being
obtained from these agencies were also considered. But, The delegation of power for such approvals rests with an
those cases of wilful default, fraud and malfeasance will not authority (individual or committee, as the case may be)
be covered. which is at least one level higher in hierarchy than the
authority vested with the power to sanction the credit /
Further, adequate care should be taken to ensure that the investment exposure.
compromise settlements are done in a fair and transparent
manner and in full compliance with the RBI guidelines on It is important to state that any official who was part of
the matter. Further, the concerned authority sanctioning a sanctioning the loan (as individual or part of a committee)
compromise/OTS should append a certificate stating that the shall not be part of the approving the proposal for
compromise settlements are in conformity with the RBI compromise settlement of the same loan account. Similarly,
guidelines (2). Similarly, compromise settlements where the proposals for compromise settlements in respect of debtors
time for payment of the agreed settlement amount exceeds classified as fraud or wilful defaulter shall require the
three months shall be treated as restructuring (3). Recently approval of the Board in all cases.
in June 2023, RBI has brought out a comprehensive
Framework for Compromise Settlements and Technical Lastly, the cooling period to be adopted in respect of
Write-offs (4). As per the Framework, the compromise exposures subjected to technical write-offs shall be as per
settlement refers to any negotiated arrangement with the the Board approved policies of the banks. Thus, the
borrower to fully settle the claims of the bank against the Framework provides sufficient clarity in the matters
borrower in cash; it may entail some sacrifice on the part concerning loan compromise and write offs.

28 | 2023 | OCTOBER | BANKING FINANCE