Bank unions slam RBI’s decision on allowing compromise settlement for wilful defaulters

“As key stakeholders in the banking industry, we have always advocated for strict measures to address the issue of wilful defaulters. We firmly believe that allowing compromise settlement for accounts classified as fraud or wilful defaulters is an affront to the principles of justice and accountability,” said All India Bank Officers’ Confederation (AIBOC) and All India Bank Employees Association (AIBEA), representing 6 lakh bank employees. “It not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations,” they said.

The RBI, in its ‘Prudential Framework for Resolution of Stressed Assets’ (June 7, 2019), made clear that the borrowers who committed frauds/ malfeasance/ wilful default will remain ineligible for restructuring.

“Now this sudden change in the framework by the central bank to grant compromise settlements to wilful defaulters came as a shocker and it will not only lead to erosion of public trust in the banking sector but also undermines the confidence of depositors,” AIBEA and AIBOC said.

Banks can 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, the RBI said in a circular on June 8, 2023.

“It fosters an environment where individuals and entities with the means to repay their debts choose to evade their responsibilities without facing appropriate consequences. Such leniency serves to perpetuate a culture of non-compliance and moral hazard, leaving banks and their employees bearing the brunt of the losses,” they said.

According to them, it is worth noting that wilful defaults have a significant impact on the financial stability of banks and the overall economy. “By allowing them to settle their loans under compromise, the RBI is essentially condoning their wrongful actions and placing the burden of their misdeeds on the shoulders of ordinary citizens and hardworking bank employees,” they said. Moreover, as per the framework, the bank boards have been authorized to grant such leniency as they deem fit, for compromise settlements of wilful defaulters.

In February 2016, the Standing Committee on Finance recommended for accountability of nominee directors of the RBI/ Ministry on the bank boards as well as the CMDs and MDs of banks.

The list of top wilful defaulters, as suggested by the Standing Committee, is yet to be published. The RBI should make the list of the wilful defaulters’ public, introduce stricter penalties, enhanced scrutiny and a more proactive approach to identify and prevent potential defaulters.