RBI Allows Lenders to Settle Loans of Wilful Defaulters Under Compromise Settlement

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On June 8, the RBI issued a circular which said that regulated entities may undertake compromise settlements of accounts categorised as wilful defaulters, without prejudice to the criminal proceedings against them. While some bankers say it will help to recover money faster, unions argue it will promote fraudsters. Banking Union has raised concerns on RBI’s move to settle loans of wilful defaulters will a have serious impact on the banking system. It is the middle class people whose deposits will be used for writing off loans with a small recovery.

Till 2019, the RBI had clearly instructed the banks vide its circular notification ‘RBI/2018-19/203, DBR No.BP.BC 45/21.04.048/2018-19 dated 7.6.2019 vide para 34’ as “borrowers who have committed frauds/malfeasance/wilful default will remain ineligible for restructuring”.

This was a reiteration of the earlier instructions which existed for long and were in force till June 8, 2023. Shockingly, the central bank modified its circular ‘RBI/2023-24/40 DOR.STR.REC.20/21.04.048/2023-24’, dated June 8, 2023, allegedly to help wilful defaulters and fraudsters who are criminals. It says in para 6(ii), “Proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter, as permitted in terms of clause 13 of this annex, shall require approval of the Board in all cases.”

Major Bankers are having personal views that this is going to have a serious impact on the banking system. It is the depositors from the middle class whose deposits will be used for writing off loans with a small recovery. And, the criminals can once again avail loan! His CIBIL rating will improve as his data will be cleansed. Naturally, the good borrowers who are promptly repaying will start defaulting. This will affect the banks. Except the borrowers who have given strong collateral, others will tend to default and expect write off. 

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