The Reserve Bank of India (RBI) has introduced a comprehensive regulatory framework to govern compromise settlements and technical write-offs for regulated entities (REs). This move aims to enhance the resolution of stressed assets and standardize instructions across all REs. The framework, which integrates various previous guidelines, was announced in the Statement on Developmental and Regulatory Policies on June 8, 2023, and comes into immediate effect.
Key Provisions
The framework mandates that all REs develop Board-approved policies for both compromise settlements and technical write-offs. A compromise settlement refers to any negotiated arrangement with the borrower to fully settle the claims of the RE against the borrower in cash, which may involve some sacrifice by the RE. A technical write-off involves writing off non-performing assets for accounting purposes without waiving claims against the borrower or prejudicing recovery efforts.
Board-approved Policies
REs must create comprehensive policies outlining the processes for compromise settlements and technical write-offs. These policies should include specific conditions such as minimum ageing and collateral value deterioration. Additionally, a graded framework for examining staff accountability must be established, with reasonable thresholds and timelines.
In compromise settlements, policies must detail the permissible sacrifice for various exposures while prudently estimating the current realizable value of security or collateral. The objective is to maximize recovery from distressed borrowers at minimal expense.
Delegation of Power
The framework requires that the approval of compromise settlements and technical write-offs be delegated to an authority at least one level higher than the one that sanctioned the original credit exposure. Officials involved in sanctioning the loan cannot participate in approving its compromise settlement. In cases involving debtors classified as fraud or wilful defaulters, Board approval is mandatory.
Prudential Treatment and Reporting
Compromise settlements with a payment period exceeding three months are treated as restructuring. For partial technical write-offs, the prudential requirements for residual exposure must reference the original exposure. There must be a reporting mechanism to the next higher authority at least quarterly, with detailed reports presented to the Board.
Oversight and Cooling Period
The Board must ensure adequate oversight, covering trends in the number of accounts and amounts subjected to compromise settlements and technical write-offs. It must also monitor accounts classified as fraud, red-flagged, or wilful defaults, and evaluate the extent of recovery in technically written-off accounts.
A cooling period is mandated for borrowers subject to compromise settlements before REs can assume fresh exposures to them. For non-farm credit exposures, this period must be at least 12 months. For farm credit exposures, the cooling period is determined by the RE’s Board-approved policies.
Legal and Judicial Provisions
Compromise settlements must comply with existing statutes. If recovery proceedings are ongoing in a judicial forum, any settlement requires a consent decree from the concerned judicial authorities. This framework repeals several previous circulars, including those issued in 1995, 2007, and 2010.
This comprehensive framework by the RBI is a significant step towards streamlining the resolution of stressed assets, providing a clear and standardized approach for all regulated entities.
Access the full RBI circular here
