CONCERNS OVER ASSET VALUE EROSION: Govt tells banks to avoid settlements

Move after resumption of RBI compromise formula for wilful defaulters

- PRIYANSH VERMA

THE FINANCE MINISTRY and the Insolvency and Bankruptcy Board of India (IBBI) want banks to exercise restraint while undertaking compromise settlements or technical write-offs for accounts tagged as wilful defaults or frauds.

A senior official said such settlement process could delay debt recovery under the Insolvency and Bankruptcy Code (IBC) further, leading to erosion of asset values.

"The Department of Financial Services (DFS) in the finance ministry is in touch with the banks to persuade them to initiate insolvency process at the right time... in case of defaults, they ought to follow the IBC process without delay. The DFS is aiding the IBBI in this," the official said, asking not to be identified.

"Banks often take time to start IBC resolution process as they prefer settlement with the debtors. This leads to loss in value of the assets and subsequently, low recovery," the official said.

The compromise settlement system has long been available to banks as one of the ways to tackle non-performing assets. This has also been one of the efficient ways of debt recovery.

The Reserve Bank of India via a circular dated June 8, 2023 re-introduced the option for wilful defaulters, without prejudice to criminal proceedings against them.

THIS AMOUNTED to a reversal of a policy adopted three years earlier, which made borrowers who have been found to have committed fraud, malfeasance or wilful default, ineligible for restructuring.

The idea is to allow lenders to exercise discretion on how to deal with individual cases of defaults by applying their commercial judgment.