While the Reserve Bank of India’s changes to the rules on compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud may have caused some initial confusion, bankers are now saying it will speed up the process of recovery. Many have pointed out that the June 8 circular was only an iteration of the RBI’s earlier rules on stressed assets resolution.
“The one-time settlement mechanism has always been there for stressed accounts. Banks have been settling with borrowers outside the National Company Law Tribunal (NCLT) for decades. Several small-value wholesale and retail banking settlements take place when it is observed that the chances of recovery are slim if the bank follows the laid-down procedures. Now, these measures can be extended for higher amounts as well as bigger loan accounts,” a senior private sector banker explained.
Another private sector banker said nearly all banks have policies to settle with wilful defaulters’ accounts, and those policies often have the boards’ approval. The board policy also decides on the cooling period, which refers to the period wherein lenders do not sanction fresh credit lines to the defaulter after his account is classified as a non-performing asset or fraud. A couple of lenders have a cooling period of as high as three years, as banks sometimes take heavy haircut while compromising with such delinquent borrower, the banker said.
According to another banker at a large public sector bank, after a borrower has been declared a wilful defaulter, the bank goes through a process of recovery during which a logical conclusion must be reached and visibility should be there on all attached securities of the borrower.
Once the realisable recovery is completed, only then can a borrower get consideration for fresh credit lines. The fresh credit assessment may be different than earlier as the borrower had defaulted, and the new loan is extended in tandem with the borrower’s new net worth.
“That is what RBI’s intention is. That you do not close all chapters of life for a particular individual whose business has got resolved through a meticulous process,” the banker said. All the three bankers quoted above, however, say banks seldom sanction fresh loans to wilful defaulters and fraud account borrowers.
“More often, we tend to stay away (from fresh credit lines) unless there was a normal business issue. Business problems are everywhere but the philosophy should be that we should quickly settle with the borrower, otherwise it just keeps festering,” the private banker said.
The top 50 wilful defaulters in India owed banks as much as Rs 92,570 crore as of March 2022, with Gitanjali Gems, set up by now-fugitive businessman Mehul Choksi, having been emerged as the biggest such defaulter.