Banks may lend to wilful defaulters after 5 years of compromise settlement: Report

Wilful defaulters may get a loan from banks after 5 years of compromise settlement only if there is change in promoters, reported Business Standard. The banks can also restructure the debt.

On 8th June, the RBI issued a notification regarding the compromise settlement, that said the proposals for compromise settlement for wilful defaulters would require approval by a board.

As per Business Standard, in May 2007, the RBI had advised through a letter to the Indian Banks’ Association that the lenders might enter into compromise settlement with wilful defaulters/fraudulent borrowers without prejudice to the criminal proceeding underway against such borrowers. Such cases have to be vetted by the management committee of the Board or the Board itself.

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The RBI had also issued a framework in 2019 that barred restructuring of accounts of wilful defaulters and fraud accounts without a change in promoter. This was also applicable in the context of compromise settlement.

Business Standard cited sources and said that the provision to permit compromise settlement for wilful defaulters without prejudice to criminal proceeding underway has been a established regulatory stance for more than 15 years.

The current notification by the RBI has only rationalised the already existing regulatory guidance on compromise settlements and has consolidated various instructions issued in the past.

This is also seen as a way to help maximise the recovery prospects for regulated entities, without any compromise on pursuing the legal proceedings.

Earlier, India's bank unions had opposed the Reserve Bank's move to allow lenders to settle loans of wilful defaulters under compromise settlement.