The cooling period for exposures other than farm credit exposures should be subject to a floor of 12 months. Regulated entities like banks and finance companies are free to stipulate higher cooling periods in terms of their board-approved policies, RBI said. Banks had approved several compromise settlements running into hundreds of crores with huge haircuts – or the reduction of outstanding payments or loans that will not be repaid by the borrowers – leading to huge losses for banks.

A compromise settlement with the borrowers, with or without involving remission or sacrifices, is negotiated by the bank, provided it is ensured that such compromise results not only in early recovery of dues but also saves cost to the bank in terms of legal expenses and other costs.

“RBI nod for compromise settlement for wilful defaulters and fraud companies can lead to a tricky situation. There’s a possibility that more public money will be lost in the process. A wilful defaulter is a borrower who refuses to repay loans despite having the capacity to pay up,” said an official of a bank.

On the other hand, the cooling period to be adopted in respect of exposures subjected to technical write-offs should be as per the board-approved policies of banks and NBFCs. The reduction in NPAs due to write-offs was Rs 13,22,309 crore in the last ten years, the RBI had said in an RTI reply to The Indian Express. In the last ten years, write-offs, or bad loans taken out from the NPA books for accounting and tax purposes, were used by banks to show lower non-performing assets (NPAs). According to bankers, there is sufficient evidence, anecdotal and otherwise, that banks and corporates often misuse restructuring for ‘evergreening’ problem accounts to keep the reported NPA levels low. Corporations were allowed to opt for the liberal restructuring route between 2000 and 2014 when a host of companies used new loans from banks to evergreen their loan books. However, with the enactment of the bankruptcy code, evergreening has declined, but recovery has remained abysmally low.

The latest warning from RBI Governor Shaktikanta Das indicates that evergreening is still going on, implying that all is not hunky-dory in the banking system. It usually happens due to the unholy relationship between bankers and borrowers.

Further, wherever banks had commenced recovery proceedings under a judicial forum and the same is pending before such a forum, any settlement arrived with the borrower should be subject to obtaining a consent decree from the concerned judicial authorities.

There were complaints from Debt Recovery Tribunals (DRTs) that banks were undertaking compromise settlements without informing DRTs. The DRT, Ernakulam had observed in a case that although the bank and the defendant borrowers had reached a settlement under the compromise settlement scheme, the bank had not only failed to obtain the consent decree from the DRT but had also suppressed from the DRT the fact of settlement for more than two and half years. Recovery of debts due to banks is an important activity that aims at protecting the interest of the depositors and other stakeholders. If banks do not recover NPAs, depositors and other stakeholders will ultimately suffer.  “Therefore, any compromise settlement should have an underlying objective of recovery of dues to the maximum extent possible at minimum expense and within the shortest possible time frame,” said a Union Bank of India note on compromise settlements.

“While negotiating compromise settlements, it should be appreciated that the bank is a public sector entity and the stakeholders are taxpaying general public. Therefore, more than the interest of the Borrowers, the interest of public at large should be kept in mind,” the note said.