PSBs to step up one-time settlement in written-off loans

PSBs to step up one-time settlement in written-off loans

Subject : Economy

Section: Monetary Policy

Key Points:

• Public sector banks (PSBs) are expected to step up one-time settlement (OTS) in written-off loans as the Finance Ministry and the Reserve Bank of India have emphasised on the importance of improving recovery from these accounts.
• Since legal action can be drawn out, the state-owned lenders are seen actively pursuing OTS to meet the Finance Ministry-set target of making about 40 per cent recovery from written-off loan accounts.
• PSBs could recover only 14 per cent (or ₹1.03-lakh crore) from written-off loans aggregating ₹7.34-lakh crore in the last five years ended March 2022.

What are written off assets:

• Banks can remove non-performing loans, including those in respect of which full provisioning has been made, on completion of four years from their balance-sheet by way of write-off to improve the key metric relating to asset quality – gross non-performing assets ratio.
• Although the Banks can undertake legal channels to initiate legal recovery proceedings against delinquent borrowers, these methods suffer from delays and low recovery. The possible avenues include four channels – the National Company Law Tribunal, the Debt Recovery Tribunal, SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002, and Lok Adalats.

Compromise settlement:

• Compromise settlement refers to a negotiated settlement where a borrower offers to pay and the bank agrees to accept in full and final settlement of its dues an amount less than the total amount due to them under the loan contract. This settlement invariably involves a certain sacrifice (haircut) by way of write off and/or waiver of a portion of the lender’s dues on a one-time basis.
• RBI has also directed banks to fix a minimum cooling period of at least 12 months before making fresh exposures to borrowers who had undergone compromise settlements.
• Banks can now 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, as per the RBI June 2023 circular.
• The central bank has virtually reversed its earlier policy of keeping wilful defaulters out of compromise settlement. It is noteworthy that ‘Prudential Framework for Resolution of Stressed Assets’, still makes wilful defaulters ineligible for restructuring.