Based on recent guidelines issued by the Reserve Bank of India on Wilful Defaulters-
If businesses in an economy are enticed to lose money at a bank’s cost rather than make money, a financial abyss may emerge. The Indian banking industry has in recent past has got one of the highest percentages of loan assets classified as non-performing assets (NPAs). There was a time, when India is listed as having the fifth-highest level of non-performing assets (NPAs) in a report by CARE Ratings of 2020. The referred report divided the world’s nations into four groups: those with very low levels of NPAs, those with low levels of NPAs, those with medium levels of NPAs, and those with high levels of NPAs. India has been categorised as having “high levels of NPAs” and is in category 4 with an NPA ratio of 9.85 percent. Only Greece (36.67%), Italy (16.35%), Portugal (15.52%), and Ireland (11.85%) have a worse NPAs scenario than India.
Gradually with lot of efforts from all corners of Financial System, the NPA position is under little control as per recent RBIs data.Scheduled commercial banks’ net non-performing assets (NPA) ratio fell to a 10-year low of 3.9 per cent in March 2023, the Reserve Bank of India noted in the latest edition of its Financial Stability Report.The public sector banks’ financial situation has significantly improved, with profits being recorded on a consistent basis and the Insolvency and Bankruptcy Board of India (IBBI) moving quickly to resolve or liquidate their non-performing assets (NPAs). The government has also been giving the PSBs with sufficient budgetary support to maintain their sound capitalization, ensuring that their Capital Risk-Weighted Adjusted Ratio (CRAR) stays comfortably over the threshold levels of adequacy.
Now coming to the focal point of this article, the Reserve Bank of India (RBI) has recently issued the “Framework for Compromise Settlements and Technical Write-offs” on June 8. The Prudential Framework for Resolution of Stressed Assets, which was released exactly four years ago, was followed by the release of this framework, which tries to harmonise and rationalise the preceding guidelines.
There is a clause in the said framework which states that accounts flagged as fraudulent or wilful defaulters are also eligible for compromise settlement under the Framework, provided the proposals for such settlements are approved by the Board of the REs (Regulated Entities), is perhaps the most intriguing and, as expected, it did spark widespread criticism. The extant guidelines say –“REs may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.”
The framework has provided information on how lenders can handle the settlement of these accounts. For instance, explicit guidance is expected from the relevant boards. They must also set up a system of accountability for the personnel handling these instances. An official, for instance, who participated in the loan’s sanctioning as an individual or as a committee member won’t be participating in this procedure. In all circumstances, board approval is required before any settlement for wilful defaulters. It is anticipated that any compromise agreements for accounts labelled as fraud or wilful defaulters will not affect current criminal investigations.In addition, there would be a cooling-off period before new loans could be issued to borrowers who benefited from the compromise settlement, as decided by the Boards of the institutions.Acompromise settlement would refer to an agreement reached with the borrower to fully resolve the lender’s claims, which would necessitate the sacrifice of some amount owed by the borrower.
Some bank unions disagree with it and have called it a harmful move that could jeopardise the stability of the banking system. The RBI decision could be harmful to the banking sector and depositors, since defaulters and fraudsters are being excused for their wrongdoings, which will fall disproportionately on ordinary people, especially depositors. It promotes dishonest borrowers while also sending an unpleasant message to honourable borrowers who make an effort to fulfil their financial responsibilities. The RBI’s most recent “Framework for Compromise Settlements and Technical Write-Offs” is viewed as a negative move that could destabilize financial sector and undercut efforts to effectively deal with wilful defaulters.
According to reports, lenders want more information about lending to accounts that have been classified as wilful defaulters or fraudulent. This is to be anticipated, and the regulator ought to be ready to dispel any questions. The worries voiced by bank staff unions, meanwhile, are overstated. Banks regularly make a lot of lending decisions, and even under the best of circumstances, some of them may be flawed. Businesses may experience difficulties due to a variety of circumstances, such as unanticipated changes in the macroeconomic climate that may have an impact on borrowers’ capacity to repay loans. In such circumstances, banks frequently alter the conditions of loans. The Insolvency and Bankruptcy Code is another possibility for them to recoup loans. Another choice is the compromise settlement framework, which could be helpful, for instance, in settling relatively minor loans. Dealing with accounts labelled as deliberate defaulters or fraud may cause considerable stress.Therefore, it would be crucial to move forward cautiously and openly. The structure allows for a good deal of flexibility.
There may be specific approaches to dealing with this precarious situation of addressing wilful defaulters like in order to examine, analyse, and ultimately forecast wilful defaultspublic sector bank may appoint a specialised department to conduct the necessary investigation into the moral and ethical character of businesses. But who is to say that, despite their expertise, these bankers wouldn’t be duped by even more astute borrowers or, worse, wouldn’t act favourably or prejudicially? There may be another strategy that may involve academician and decision-makers to develop a methodology that is as impartial, methodical, and comprehensive as possible while acknowledging that it won’t be perfect.The methodology may change over time, but to ignore the issue because it is challenging to address both theoretically and empirically is to act as though it doesn’t exist. There are other suggestive ways like Banks must make use of transaction information made available through payment methods and work with numerous law enforcement organisations, includingIncome Tax department, Revenue Intelligence, Central Economic Intelligence Bureau, Enforcement Directorate (ED) and Special Fraud Investigation Office (SFIO).These organisations are tasked with looking into corporate financial irregularities such money laundering, tax and duty evasions, and other shady financial activities. Information on these acts can be efficiently used by banks to cut down on loan defaults.The need of the hour is to have improvisationin the mechanism of sharing information among lenders,which can improve lending and lower default rates by reducing moral hazard and adverse selection.
Since this issue is likely to persist in some way unless banks and regulators figure out a way to eliminate such wilful defaulters. Procrastination, or at best wishful thinking, would be to ignore this important issue and hope that the structural cracks caused by such syphoning off of public funds would eventually close. If the issue is not addressed now, the public sector banks may eventually have to deal with even worse wilful defaults.
As it well proven fact that lending criteria continue to be the most important component of the lenders’ businesses. Since the banking system’s asset quality has greatly improved over the past several years, it is crucial to maintain the stability of the banking industry. Banks must closely monitor loan accounts in this situation and inform all parties of the full picture. Shri. Shaktikanta Das, Governor -Reserve Bank of India, has recently make a point that the regulator has discovered creative techniques that banks are using to hide stress. Additionally, new approaches to ever-greening are allegedly being used by banks.Lenders must take use of all available options to recover as much money as they can from non-performing accounts.
A thriving economy depends on a robust banking industry. Making sure that the banking system recognises financial distress early and responds quickly is necessary because its failure could negatively affect other sectors.
The intension of the Reserve Bank of India on the recent move cannot be questioned as being the Banking regulator of a capital deficit country, the primary aim of the RBI is to ease the availability of capital for the purpose of investment and employment generation. However, one cannot deny the harmful effect of the move that could jeopardise the stability of the banking system. The RBI decision could be harmful to the banking sector and depositors, since defaulters and fraudsters are being excused for their wrongdoings, which will fall disproportionately on ordinary people, especially depositors.It promotes dishonest borrowers while also sending an unpleasant message to honourable borrowers who try to fulfil their financial responsibilities.The RBI’s recent move may be viewed as a negative move that could destabilize financial sector and undercut efforts to effectively deal with wilful defaulters. Reserve Bank seems to be in a dilemma over growth and financial ethics and trade-off among these is going to leave a widespread footprint on financial system of India.