In this video Mukesh Mohan Gupta has explained the contents of recent circular issued by RBI on Framework for Compromise Settlements and Technical Write-offs. The same is issued on June 08, 2023.
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The key contents of the notification are as under:
Board-approved policy
1. Regulated Entities (REs) shall put in place Board-approved policies for undertaking compromise settlements with the borrowers as well as for technical write-offs.
Compromise settlement for this purpose shall refer to any negotiated arrangement with the borrower to fully1 settle the claims of the RE against the borrower in cash; it may entail some sacrifice of the amount due from the borrower on the part of the REs with corresponding waiver of claims of the RE against the borrower to that extent.
Technical write-off for this purpose shall refer to cases where the non- performing assets remain outstanding at borrowers’ loan account level, but are written-off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.
2. The Board approved policy shall comprehensively lay down the process to be followed for all compromise settlements and technical write-offs, with specific guidance on the necessary conditions precedent such as minimum ageing, deterioration in collateral value etc. The policies shall also put in place a graded framework for examination of staff accountability in such cases with reasonable thresholds and timelines as may be decided by the Board.
3. In respect of compromise settlements, the policy shall inter alia contain provisions relating to permissible sacrifice for various categories of exposures while arriving at the settlement amount, after prudently reckoning the current realisable value of security/collateral, where available. The methodology for arriving at the realisable value of the security shall also form part of the policy. The objective shall be to maximise the possible recovery from a distressed borrower at minimum expense, in the best interest of the RE.
4. The compromise settlements and technical write-offs shall be without prejudice to any mutually agreed contractual provisions between the RE and the borrower relating to future contingent realizations or recovery by the RE, subject to such claims not being recognised in any manner on the balance sheet of REs at the time of the settlement or subsequently till actual realization of such receivables. Any such claims recognised on the balance sheet of the RE shall render the arrangement to be treated as restructuring in terms of paragraph 7 of this circular.
Cooling Period
In respect of borrowers subject to compromise settlements, there shall be a cooling period as determined by the respective Board approved policies before the REs can assume fresh exposures to such borrowers.
Provided that:
(i) The cooling period in respect of exposures other than farm credit exposures shall be subject to a floor of 12 months. REs are free to stipulate higher cooling periods in terms of their Board approved policies.
(ii) The cooling period for farm credit exposures shall be determined by the REs as per their respective Board approved policies.
Farm credit for the above purpose shall refer to credit extended to agricultural activities as listed in Annex 2 to the Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances as amended from time to time.
The cooling period to be adopted in respect of exposures subjected to technical write- offs shall be as per the Board approved policies of the REs.
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