The methodology for arriving at the realizable value of the collateral should also be part of the policy. (For representation purposes only) | Photo credit: PTI
In order to ensure maximum recovery of distressed assets, the Reserve Bank of India has allowed banks to opt for compromise settlement of fraudulent accounts and deliberate defaults.
All Regulated Entities (REs) will be required to have Board-approved policies in place for undertaking settlements in compromise with borrowers as well as for technical write-offs setting out the process to be followed for all settlements in compromise and technical write-offs, with advice on necessary prerequisites, the RBI said in a notification.
Conditions would include minimum aging, deterioration of collateral value, etc., he said.
The policies would also establish a graduated framework for the review of staff liability in such cases with reasonable thresholds and timelines that could be decided by the board. The REs may proceed with transactional transactions or technical cancellations of accounts qualified as voluntary defaulters or fraud without prejudice to the criminal proceedings in progress against these debtors.
“With respect to compromise settlements, the policy should include provisions for the allowable sacrifice for various classes of exposures while arriving at the settlement amount, after carefully calculating the current realizable value of the security/ warranty, if any,” according to the notification. .
The methodology for arriving at the realizable value of the collateral should also be part of the policy.
The objective would be to maximize possible recovery from a distressed borrower at minimum expense, in the best interest of the regulated entity (RE).
“Compromise settlements and technical write-offs would be without prejudice to any contractual provisions mutually agreed between the RE and the Borrower regarding possible future realizations or collection by the RE, provided that such receivables do not in any way be recognized on the balance sheet of the ERs at the time of settlement or thereafter until the actual realization of these claims,” he said.
Any such claim recognized on the ER’s balance sheet would render the arrangement to be treated as restructured under existing guidelines, he added.
With respect to borrowers subject to Compromise Settlements, according to the notification, there would be a cool-down period as determined by policies approved by the respective Board before the REs could assume new exposures to such borrowers.
The cool-down period for exposures other than agricultural credit exposures would be subject to a 12-month floor.
However, he said, ERs are free to stipulate higher cooling periods based on their Board-approved policies. The Farm Credit Risk Cool-Down Period would be determined by the REs in accordance with their respective policies approved by the Board.