What changed
RBI consolidated and harmonized previous instructions on compromise settlements and technical write-offs into a single framework applicable to all regulated entities. The framework mandates board-approved policies with specific guidance on conditions precedent, permissible sacrifice, and staff accountability. It also clarifies that technical write-offs are accounting entries without waiver of recovery rights.
What it means for you
Banks and lenders must now formalize their approach to compromise settlements and technical write-offs through board-approved policies, ensuring consistency and transparency. The framework emphasizes maximizing recovery while minimizing expense, and requires a graded staff accountability mechanism. This could lead to more efficient resolution of stressed assets but demands robust policy documentation and compliance.
What you must do
- Review and update your board-approved policy for compromise settlements and technical write-offs to align with the new framework.
- Ensure the policy includes clear criteria for minimum ageing, collateral valuation, and permissible sacrifice for different exposure categories.
- Implement a graded staff accountability framework with reasonable thresholds and timelines as per board decisions.
- Train relevant teams on the new requirements, especially the distinction between technical write-offs (accounting only) and compromise settlements (with waiver).
Who it affects
Commercial Banks including Small Finance Banks, Local Area Banks, and Regional Rural Banks, Primary (Urban) Co-operative Banks, State Co-operative Banks, Central Co-operative Banks, All-India Financial Institutions, Non-Banking Financial Companies including Housing Finance Companies
What is the key difference between a compromise settlement and a technical write-off under this framework?
A compromise settlement involves a negotiated cash settlement with the borrower, including a waiver of claims and some sacrifice by the lender. A technical write-off is an accounting entry where the loan remains outstanding at the borrower's account level, with no waiver of recovery rights.
Does this framework replace the Prudential Framework for Resolution of Stressed Assets of 2019?
No, the new framework is without prejudice to the Prudential Framework or other stressed asset resolution guidelines. It operates alongside them, providing specific rules for compromise settlements and technical write-offs.
What must our board-approved policy include for compromise settlements?
The policy must cover permissible sacrifice for various exposure categories, methodology for realizable value of security, conditions precedent like minimum ageing, and a graded staff accountability framework with reasonable thresholds and timelines.