RBI releases framework for compromise settlement and technical write-offs

The Reserve Bank of India (RBI) released a framework for compromise settlements and technical write-offs.21 Compromise settlement refers to an arrangement to fully settle the claims of a regulated entity (such as banks) against a borrower in cash. This may involve writing off a certain percentage of the dues of the borrower. Compromise settlements will be categorised as loan restructuring. Technical write-offs involve writing-off non-performing assets (loans) from the books of the regulated entity without any waiver of claims against the borrower.

Key features include:

▪ Policy for settlements: Regulated entities must have a board-approved policy for undertaking compromise settlements and technical write-offs. The policy should provide for the process to be followed for such settlements. In case of compromise settlements, the policy should provide for the permissible level of write-off while arriving at the settlement amount.

▪ Cooling period: In case of borrowers involved in compromise settlements, there must be a cooling period before the regulated entities can provide fresh loans. For loans other than farm credit, this cooling period should be of at least 12 months. For technical write-offs, the cooling period would be as per the board-approved policies of the regulated entities.

▪ Fraud accounts: Regulated entities may undertake compromise settlements or technical write-offs in respect of accounts categorised as fraud or wilful defaulters. This would not affect the criminal proceedings that are underway against the debtors.

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