To
Shri Shaktikanta Das
Governor
RBI
Dear Shri Das,
I refer to RBI’s latest guidelines issued on 8-6-2023 (Notification No.RBI/2023-24/40
DOR.STR.REC.20/21.04.048/2023-24 8-6-2023) on Framework for Compromise Settlements and Technical Write-offs, modifying the earlier guidelines issued on 7-6-2019 (Notification RBI/2018-19/203 DBR.No.BP.BC.45/21.04.048/2018-19 7-6-2019).
Para 34 of the 2019 notification stipulated, “Borrowers who have committed frauds/ malfeasance/ wilful default will remain ineligible for restructuring. However, in cases where the existing promoters are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management, lenders may take a view on restructuring such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters/management”
In contrast, the latest notification dated 8-6-2023 reads as follows:
“Para 6 (ii): proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter, as permitted in terms of clause 13 of this Annex, shall require approval of the Board in all cases.
Para 13 (Annexe): REs (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 underway against such debtors“
In other words, RBI has, for reasons best known to it, made a volte-face and abruptly relaxed the 2019 stipulation that no “compromise settlement” would be permitted in the case of “borrowers who have committed fraud/ malfeasance/ wilful default“, implying that a borrower who has committed fraud or one against whom criminal proceedings for fraud are ongoing, in respect of funds borrowed from a bank, would hereafter be eligible for loans from that bank. Fraud implies a promoter falsifying accounts and syphoning off the borrowed money for personal gains. It may also involve laundering of the borrowed money to overseas shell companies either for tax evasion or for misusing it to manipulate the domestic stock market, as has been the case with several wilful defaulters in recent times.
Allowing wilful defaulters charged with violating the law of the land and misappropriating funds already borrowed from the banks, to borrow additional amounts from the same banks, would amount to outright condonation of fraud and making a mockery of the legal system we have.
Compromise settlements such as this one, which amount to condoning fraud, not only expose the hard-earned savings of the banks’ depositors to considerable risk but also encourage wilful defaulters to take further risks including committing acts of malfeasance, at the cost of the banking system. It is clearly a case of undue risks being taken by borrowers, with the corresponding costs inflicted on depositors.
Does not the RBI have the statutory obligation, as the banking regulator, to safeguard the interests of the depositors and the interests of the government which holds dominant shareholding in PSU banks? By issuing such an imprudent set of guidelines, is not the RBI triggering yet another crisis of non-performing assets that plagued the banking system during the last decade?
Section 21 of the Banking Regulation Act in pursuance of which the RBI issued the above 2023 notification reads as follows:
“Power of Reserve Bank to control advances by banking companies.—(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally”
Since the 2023 notification is neither in the interests of the depositors nor in the public interest, strictly, it violates the letter and the spirit of the above statutory requirement.
While the banks are encouraged to “technically write-off” bad loans from their financial statements to provide false comfort to the government and the public at large, according to statements originating from the Finance Ministry (https://economictimes.indiatimes.com/industry/banking/finance/finance-ministry-wants-state-run-banks-banks-to-enhance-recovery-rate-from-written-off-accounts-to-about-40/articleshow/99908818.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst), the rate of recovery from written-off loans is hardly 15%, suggesting that the so-called “technical write-off” of loans reflects that most of those loans cannot be recovered, which shows that there is no case whatsoever for condoning wilful default by borrowers, more so, no case for providing any leeway to those who commit fraud.
The PSU banks, forced to extend credit to the private corporate sector in the name of facilitating economic growth, already face a wide range of problems, such as asset-liability mismatch, unfair competition with private banks etc. RBI’s latest compromise settlement guidelines will only exacerbate the health of the PSU banks by sowing the seeds of yet another NPA crisis, which can cripple the economy.
I feel that the RBI should revisit the 2023 compromise settlement framework and rescind it. Instead, there is a strong case for RBI to tighten the restrictions on wilful defaulters.
Regards,
Yours sincerely,
E A S Sarma
Former Secretary to the Government of India
Visakhapatnam
