The RBI recently vide notification dated 08.06.2023 unveiled a comprehensive framework for compromise settlements and technical write-offs for Regulated Entities (REs). This framework aims to provide guidelines for reaching agreements with borrowers and eliminating non-performing assets while promoting transparency and accountability. In accordance with this framework, REs must create policies that have received board approval and specify the steps to take for compromise settlements and technical write-offs. These regulations should include a graded framework for evaluating staff accountability as well as requirements precedent as minimum ageing and decline in collateral value. Negotiated arrangements with borrowers are a part of compromise settlements, which entirely settle the REs' claims. These agreements may call for a reduction in the borrower's payment obligation as well as a corresponding discharge of claims. Technical write-offs, on the other hand, refer to the accounting treatment of non-performing assets without relieving the borrower from any liability. In the best interest of the REs, the goal of these settlements and write-offs is to maximize recovery from troubled borrowers while minimizing expenses.
The delegation of power for approval/sanction of compromise settlements and technical write-offs is also covered in the policy guidelines. The authority responsible for sanctioning credit or investment exposures should be at least one level below the authority responsible for settlement approval. Additionally, the Board must always approve proposals for compromise settlements involving debtors who have been identified as fraud or wilful defaulters. Compromise settlements with a payment period longer than three months will be recognized as restructuring under the Prudential Framework on the Resolution of Stressed Assets in order to ensure prudential treatment. The prudential requirements for partial technical write-offs will be based on the initial exposure, and the provisioning must comply with the present requirements.
In order to ensure oversight and transparency, the RBI emphasizes the significance of reporting mechanisms. The subsequent higher authority will require the REs to register compromise settlements and technical write-offs on a quarterly basis. The Board will be informed of any settlements or write-offs that have been authorized by the MD & CEO or the Board Level Committee. The Board will also establish reporting criteria that must be followed. These guidelines will cover a variety of aspects, including trends in settlements, a breakdown of various account classifications, and the degree of recovery in technically written-off accounts. A cooling period is also included in the framework before REs may take on fresh exposures to borrowers who have undergone compromise settlements. The board-approved policies will determine the cooling period, with a floor of a minimum of 12 months for non-farm credit exposures. Individual REs will determine the cooling period for exposures to farm credit. The guideline also discusses how accounts classified as fraud or willful defaulters should be handled. For such accounts, REs are free to pursue compromise agreements or technical write-offs without affecting the ongoing criminal proceedings.
Lastly, the provisions of any other applicable law will not be affected by any compromise agreements reached under this framework. Any settlement with the borrower will be dependent on obtaining a consent decree from the relevant judicial authorities in circumstances where recovery procedures are ongoing before a judicial forum. The RBI's implementation of this framework is an important step in ensuring a structured and transparent procedure for compromise agreements and technical write-offs. By maximizing recovery while upholding accountability within the banking system, it seeks to find a balance.