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Less than two weeks after Reserve Bank of India deputy governor M K Jain met board members of private and public sector banks, the central bank has made directors of lending banks accountable for settling with wilful defaulters. This is the first time that the RBI has issued norms for settling with such defaulters.

“Regulated entities may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding under way against such debtors… Proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter shall require board approval in all cases,” read the circular issued by RBI on this topic.

A wilful defaulter is a debtor who does not pay up despite having the capacity to do so. The act of removing NPAs from the books of banks for accounting purposes without giving up the right of the lender to recover the debt is referred to as technical write-off.

What is of significance is that the central bank enjoins the lending institutions that the persons who would sign on such settlements should be senior to those who originally sanctioned the loan on the behalf of the bank.

The circular from RBI also makes it clear that wilful defaulters and corporate entities can make negotiated settlements with banks. But the central bank has also stipulated that lending institutions must observe a “cooling off” period of 12 months before taking up another fresh case of lending to such a debtor. This “cooling off” period should be calculated from the date of settlement of the old credit.

The new measures seem to be aimed at ensuring that banks quickly recover dues, save legal expenses and miscellaneous costs and involve the board members, which is the highest policymaking body of any lender in the process. Recently, banks entered into compromise settlements involving huge amounts and taking big knocks on the outstanding amounts that would never be paid by the debtor.

The RBI communication said, “While negotiating compromise settlements, it should be appreciated that the banks is a public sector entity and the stakeholders are taxpaying general public. Therefore, more than the interest of the borrowers, the interest of public should be kept in mind.”

This is exactly what the RBI deputy governor told the board members of banks in his recent meeting in Mumbai. M K Jain had said that they should prioritise the interest of the public rather than of the shareholders and towards this end the board members have to shoulder significant responsibilities to ensure transparency, mitigate risks and ensure responsible banking.

The RBI governor, too, recently expressed disapproval on how banks were dealing with bad debt.