The Reserve Bank of India (RBI) has been overseeing the implementation of its Comprehensive Regulatory Framework for Compromise Settlements and Technical Write-offs, issued under Circular No. RBI/2023-24/40, which mandates that all regulated entities develop and operationalise Board-approved policies governing the resolution of stressed loan accounts. As of May 2024, regulated entities across the banking and NBFC sectors are in various stages of implementing these tightened norms, which introduce mandatory cooling periods, hierarchical approval requirements, and restrictions on fresh credit to settled borrowers.
Background
Prior to this framework, the regulatory treatment of compromise settlements — where a lender accepts less than the full outstanding amount to resolve a non-performing account — varied significantly across different categories of regulated entities. Banks, Non-Banking Financial Companies (NBFCs), co-operative banks, and All-India Financial Institutions each operated under disparate guidelines, leading to inconsistencies in how defaulting borrowers were treated after settlement.
The RBI identified this regulatory fragmentation as a concern, particularly in the context of wilful defaulters who could exploit inconsistencies to obtain fresh credit from other lenders shortly after settling debts at a discount. The comprehensive framework aims to harmonise norms across all regulated entities and establish minimum standards that cannot be diluted by individual institutional policies.
Key Provisions
The framework establishes the following mandatory requirements:
Mandatory cooling period: After a compromise settlement, a minimum cooling period of 12 months must elapse before any regulated entity can assume fresh credit exposure to the settled borrower. This applies to all non-farm credit exposures and prevents borrowers from immediately accessing new credit after settling old debts at a discount.
Hierarchical approval: The authority approving a compromise settlement must be at least one level higher than the authority that originally sanctioned the credit facility. Officials involved in the original loan sanction are barred from participating in settlement approval decisions.
Board approval for wilful defaulters: Where the borrower has been classified as a wilful defaulter or where fraud has been established, the compromise settlement requires approval from the Board of Directors of the regulated entity — the highest governance threshold available.
Continuation of criminal proceedings: A compromise settlement does not extinguish or affect the continuation of criminal proceedings against wilful defaulters. The settlement operates purely at the commercial level of debt recovery.
Wilful defaulter list: Borrowers on the List of Wilful Defaulters shall be removed only upon full payment of the compromise amount. Partial payments, even if reducing the outstanding below the threshold amount of Rs. 25 lakh, do not warrant removal from the list.
Implications for Practitioners
For banking and finance lawyers, this framework materially alters the negotiation dynamics of one-time settlements. The 12-month cooling period significantly impacts borrowers who require ongoing working capital or project finance, as settlement of one debt effectively freezes their ability to obtain credit across the entire regulated lending ecosystem.
Corporate restructuring advisors should note that compromise settlements with a payment period exceeding three months are now treated as restructuring for regulatory purposes — triggering additional reporting and provisioning requirements for the lending institution.
The hierarchical approval requirement introduces a practical bottleneck that may extend settlement timelines, particularly at public sector banks where committee-based approval processes are already protracted. Practitioners advising lenders should factor this into settlement structuring and timeline expectations.