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

  • July 17, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
No Comments

 

 

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.
Wilful Default

  • As per the Reserve Bank of India’s (RBI) classification, a ‘wilful default’ would be deemed to have occurred if the borrower has defaulted in meeting their repayment obligations to the lender even when they have the capacity to honour the obligations.
  • A wilful default happens when the borrower has not utilised the finance from the lender for the specific purpose for which finance was availed, and has diverted the funds for other purposes, or siphoned off funds, or disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank.
The four legal channels of Debt recovery:

  • National Company Law Tribunal under Insolvency and bankruptcy Code (IBC):
    • Under IBC, creditors can approach NCLT for starting the recovery (Corporate Insolvency Resolution) procedure.
    •  Before the IBC, the debtor was responsible for starting the resolution process, and the creditor could take separate steps to enforce security interests, money recovery, and debt restructuring. But with IBC the onus of starting the insolvency resolution process against the debtor on the creditor.
    • In 2020 the threshold value was increased from Rs. 1 Lakh to Rs. 1 Crore.
  • Debt Recovery Tribunal
    • The Debt Recovery Tribunal enforces the Recovery of Debts and Bankruptcy Act (RDB Act, 1993) and the SARFAESI ACT, 2002.
    • Threshold debt value is Rs. 20 Lakh.
    • An application to the DRT can also be made under SARFAESI when the securities are not able to discharge the entire debt. Under these circumstances, the creditors have an option of filing an application to the DRT for recovery of the remaining dues.
  • SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002
    • As per SARFAESI, 2002 the secured creditor takes possession of the securities of the debtors, when he fails to discharge all his liabilities.
    • It provides banks and financial institutions with the power to recover their loans by seizing and selling the collateral assets provided by the borrower.
  • Lok Adalats
    • Involve small value loans up to Rs 20 lakh can be amicably settled between the borrower and the lender using the forum of Lok Adalats.LokAdalats, organized by banks through the district legal services authority.
    • Lok Adalat is one of the alternative dispute redressal mechanisms, it is a forum where disputes/cases pending in the court of law or at pre-litigation stage are settled/ compromised amicably.
economy PSBs to step up one-time settlement in written-off loans