‘New settlement rules incentivise wilful defaulters’

MUMBAI:  The RBI’s recent decision to allow banks to go for compromise settlement with wilful defaulters may incentivise such defaulters, according to some bankers. However, they say that the new norms will boost the recovery for banks from distressed accounts.

The RBI, on June 8, issued a circular which stated that the regulated entities may undertake compromise settlements or technical write-offs of accounts categorised as wilful defaulters or fraud, without prejudice to the ongoing criminal proceedings against such debtors. As per the circular, proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter shall require the approval of the board in all cases.

Banks have been doing settlements with defaulters earlier under the settlement schemes but the final decision was of the lenders to go ahead with the settlement. Bankers fear that now wilful defaulters may put pressure on the banks for settlement with new norms in place.

“In the previous one-time settlement schemes, it was banks’ discretion to go for the settlement with defaulters. Banks took the decision only after doing proper due diligence,” a zonal manager of a public sector bank told the TNIE.

“Now, our concern is that the wilful defaulter may come to the bank for settlement citing the central bank’s circular and banks might come under pressure to follow the rules. The circular has intuitionalism or accorded legality to the process of settlement with wilful defaulters,” he added.

Bank unions have also expressed concern about RBI’s new rules saying that it would encourage wilful defaulters. “The RBI’s norms will incentivise wilful defaulters and will lead to more defaults,” Devidas Tuljapurkar, General Secretary, of Maharashtra State Bank Employees Federation told the TNIE.

“We demand for stringent laws to recover bank dues and amendments in the code of conduct for the elections disqualifing wilful defaulters. In the process it is wilful defaulters who are being rewarded. We demand for review in the central bank’s decision in this behalf,” Tuljapurkar said.

However, bankers agree that the new norms are expected to boost the recovery from distressed loans.
“Compared to legal process, settlement is a quick way to recover dues from defaulters. Now the defaulters know that if they settle the dues, they would get loans in future. Banks’ recoveries from distressed loans will get a big boost,” a senior bank official said.