The Reserve Bank of India’s (RBI) Framework for Compromise Settlements and Technical Write-offs has upset some trade unions who believe the rules could compromise the integrity of the banking system. This sudden realisation is difficult to understand as the provision to permit compromise settlements to defaulting borrowers has been an established regulatory stance since 2008. Moreover, regulated entities were always required to put in place board-approved policies before they entered into such settlements with the borrowers. The term `wilful defaulter’ may not have been specifically mentioned in the past, but as former RBI Deputy Governor SS Mundra has clarified, it was always there `in spirit’. By bringing out a new circular, the central bank, it appears, wants to make things abundantly clear.
One could rightly argue that such negotiated transactions create a moral hazard. It certainly does. However, it is also the responsibility of lenders to recover as much as they can and as quickly as they can. Consequently, if the borrower is able and willing to pay up, say, 60% or even 50% of the dues, it would make commercial sense to grab the proverbial `bird in hand’. The fact is that the recovery measures that lenders resorted to—debt recovery tribunals or more recently the insolvency courts—haven’t always provided the best outcomes. The cases are resolved after inordinately long delays, eroding the value of both the funds recovered and also sometimes the fixed assets. Price discovery too is sometimes a stumbling block with bankers within a consortium often disagreeing on the value and opting to litigate. The corporate debt restructuring process too resulted in lenders taking huge haircuts. Capital should be freed up and put to use quickly.
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As such, if a compromise formula helps lenders get back their money faster, it should be allowed. To be sure, criminal proceedings must proceed simultaneously and there can be no compromise whatsoever on that count. Ultimately, the courts must be left to decide on the penalty to be imposed on the promoters. So far, bankers have been reluctant to enter into compromise settlements for fear of being reproached and punished. One can understand their apprehensions. The board-approval mechanism, which makes the officers dealing with the case accountable and disallows the officer who sanctioned the loan from participating in the process, hasn’t really helped.
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On the issue of giving fresh loans to an errant borrower for a new project after a cooling-off period of five years, that too is a moral hazard and it is surprising that the RBI permits it. A breach of the debt contract is unpardonable if the borrower is a wilful defaulter or a fraudster, and the central bank should not allow any new exposure even after five years. Not surprisingly, one has not heard of bankers having engaged afresh with a defaulting promoter and it is unlikely we will hear of any. They have turned so risk averse these past few years and are so fearful of the 3Cs—CAG, CBI and CVC—it would take a brave banker to take such chances even if the RBI allows it. However, as RBI Governor Shaktikanta Das recently cautioned, lenders seem to be resorting to new ways of camouflaging stress. Such ingenuity must be curbed and bankers must up their appraisal and underwriting skills. We simply cannot afford another round of capital erosion due to high non-performing assets.