On June 8, the Reserve Bank of India (RBI) issued a circular that has sparked controversy regarding wilful defaulters and their ability to enter into compromise settlements or technical write-offs with banks and finance companies. While the RBI aims to maximize recovery and minimize bank costs, concerns have been raised about the potential leniency towards willful defaulters and the impact on justice and accountability. This article delves deeper into the RBI’s decision, its impact on various stakeholders, and the rationale behind it.
Snehaashish Pathak, a political advisor responsible for coordinating collaborative initiatives between different levels of government, has expressed the view that wilful defaults have a substantial impact on the financial stability of banks and the overall economy. Mr.Pathak believes that the guidelines and rules issued by the Reserve Bank of India (RBI) can’t be questioned, as their primary motive is to serve the nation.
Mr.Pathak’s perspective highlights the importance of addressing wilful defaults to safeguard the stability of the banking sector and the broader economy. The RBI, as the country’s central banking authority, plays a crucial role in formulating and implementing regulations and guidelines to protect the interests of financial institutions and the public.
However, it is essential to recognize that differing viewpoints exist on the RBI’s decisions and policies. Public debate and discussions are vital in a democratic society to ensure transparency, accountability, and the continuous improvement of regulatory frameworks. While the RBI’s intentions are generally focused on serving the nation’s best interests, it is still crucial to examine and evaluate the potential impacts and implications of their policies on various stakeholders.
Wilful Defaulters and fraud companies
Prior to September 2021, the RBI’s guidelines for identifying wilful defaulters were based on the borrower’s intent and conduct, considering factors such as deliberate non-payment, diversion of funds, fraudulent activities, and obstruction of recovery. However, the recent circular has shifted the focus towards financial indicators, prompting questions about whether all identified defaulters are truly willful defaulters or simply non-performing assets (NPAs).
According to a report there were 15,778 wilful default accounts involving an amount of Rs 340,570 crore as of December 2022 as against 14,206 accounts involving Rs 285,583 crore a year ago in December 2021 and 12,911 accounts for Rs 245,888 crore in December 2020, according to Transunion Cibil, a credit information company registered with the RBI.
Cooling Period and Fresh Loans
One aspect of the circular is the inclusion of a minimum 12-month cooling period for compromise settlements. This allows willful defaulters or fraudulent companies to potentially secure fresh loans, excluding farm credit exposures, after the settlement. The cooling period acts as a safeguard to ensure that these borrowers demonstrate credibility and responsibility before accessing new credit facilities. Even after the cooling period, each case will undergo thorough examination and obtain approval from the board.
Board Approval and Legal Proceedings
The RBI has mandated that each compromise settlement must be individually approved by the board. This requirement aims to ensure that the decision-making process remains transparent and accountable. Additionally, ongoing legal cases against the defaulters must continue, preventing them from evading legal consequences for their actions.
The Rationale Behind the RBI’s Decision:
The RBI’s primary objective in this circular is to maximize recovery and minimize the cost to banks. By allowing compromise settlements, the RBI aims to expedite the recovery process and prevent further deterioration of declining assets. Settling for a lesser amount today is seen as a more favorable option than engaging in prolonged litigation, considering the potential devaluation of assets over time.
While the RBI’s circular has sparked controversy and raised concerns about justice and accountability, it is essential to understand the motives behind the decision. The RBI aims to strike a balance between maximizing recovery and maintaining transparency and accountability. The circular’s impact on different stakeholders and its implications for the financial stability of banks and the middle class will continue to be a subject of debate.
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