RBI rule allowing banks to settle with willful defaulters is misleading

But according to bank unions and some political parties in India, the sun is not exactly shining in the banking universe. The reaction was prompted by a circular issued by the RBI late last week, outlining a framework for settlement settlement and technical write-offs, hours after top RBI officials delivered their speech on bank governance.

The new rule states that banks can opt for compound settlement or technical write-off for accounts classified as fraud or willful defaulters – those who have the capacity to repay but do not – without prejudice to the ongoing criminal proceedings against such borrowers. . However, this would require approval from the bank’s board in each case. RBI has issued similar circulars in the past for settlement and dealing with defaulters.

Bank unions view the RBI move as detrimental to banks and may compromise the integrity of the banking system, undermining efforts to deal with willful defaulters. Congress wants the banking regulator to repeal the latest rules and bar banks from settling with willful defaulters and fraudsters, citing write-off of total loans 10 lakh crore between 2017-18 and 2021-22. The party’s case is that honest borrowers are not given an opportunity to renegotiate the loan, while willful defaulters and fraudsters have an avenue for rehabilitation.

What is being missed in all this is the worrying fact that more than six years after the RBI allowed banks to classify accounts of willful defaulters as frauds, and with the aim of speedy resolution of stressed assets After the government further empowered banks with the bankruptcy law, the central bank is back to recommending band-aid solutions.

This is a reflection of the larger failure of the Indian judicial system in ensuring speedy resolution of cases, which could have helped prevent erosion of property value due to delay, and prevented the government from making frequent changes to the insolvency law . To plug novel attempts to game the system.

It is also unclear why the RBI and banks have been jolted by the Supreme Court ruling earlier this year – which directed the regulator and banks to give willful defaulters a hearing and submit written documents before declaring such accounts as fake. Record their reasons in – have affected the central. Bank’s latest move

Moreover, the boards of banks have the responsibility of approving settlement agreements with borrowers whose accounts have been classified as frauds or willful defaulters, easy it may sound on paper. It would require a brave board of directors to sign off on such agreements, given the “investigative adventurism” of the Central Bureau of Investigation, a former finance minister. There are still a number of bank board members with first-hand experience of such fishing operations by probe agencies. It also raises the issue of valuation, risk management and monitoring skills, and conduct of operational staff of lenders.

Governor Das listed various ways in which banks make loans ‘evergreen’ and said independent directors should ensure strong governance and effective monitoring of senior management. The advice is well-intentioned, of course, but the bigger challenge is to persuade the judiciary to step in and ensure speedy resolution of cases affecting the financial sector and the wider economy.

If interest rates remain stagnant even after the RBI cuts the policy rate, it will be in no small measure due to a pile-up of bad loans, which drives up the cost of funds in the banking system – unfairly to honest borrowers. A well-functioning resolution mechanism is important for better transmission of monetary policy.

Updated: June 15, 2023, 01:45 PM IST