Dealing with
non-performing assets (NPAs) is a common challenge for financial institutions.
When borrowers fail to repay their loans, it can have a significant impact on
the stability of these institutions. To address this issue, a framework has
been established for compromise settlements and technical write-offs, which
provides a structured approach to resolving debt-related issues.
Under this
framework, financial institutions are required to have a board-approved policy
that outlines the process for compromise settlements and technical write-offs.
This policy ensures that there is a clear and standardized procedure in place
for dealing with these situations. It covers various aspects, such as the
minimum ageing of the asset, the deterioration in collateral value, and the
necessary conditions that must be met before a settlement can be reached.
A compromise
settlement refers to a negotiated arrangement between the financial institution
and the borrower to fully settle the borrower's claims by making a cash
payment. In some cases, the financial institution may need to sacrifice a
portion of the amount owed by the borrower. However, this sacrifice should be
based on the current realizable value of the security or collateral held by the
borrower. The main objective of a compromise settlement is to maximize recovery
from distressed borrowers while minimizing expenses for the financial
institution.
On the other
hand, a technical write-off involves removing non-performing assets from the
borrower's loan account for accounting purposes. This means that the financial
institution no longer considers these assets as recoverable, although it does
not waive any claims against the borrower or give up the possibility of future
recovery. The policy provides guidelines on how to classify these write-offs
and handle the remaining exposure.
To ensure
transparency and accountability, the policy also includes a delegation of power
for approving compromise settlements and technical write-offs. The authority
responsible for approving a settlement must be at least one level higher than
the authority responsible for sanctioning the original loan. This separation of
powers helps prevent any potential conflicts of interest. Additionally, the
policy states that settlements involving borrowers classified as fraud or
wilful defaulters require approval from the board.
A robust
reporting mechanism is essential to monitor the implementation of the
framework. Financial institutions are required to report compromise settlements
and technical write-offs on a quarterly basis to the next higher authority.
This reporting includes information on the number and amounts of settlements,
accounts categorized as fraud or wilful defaulters, and the recovery achieved
through technical write-offs. The board plays a crucial role in overseeing this
process and ensuring that the framework is being followed effectively.
To prevent
potential risks associated with fresh exposures to compromised borrowers, a
cooling period is mandated. During this period, financial institutions are
restricted from assuming new exposures with borrowers who have undergone
compromise settlements. The duration of the cooling period depends on the
borrower's category and exposure type, with a minimum cooling period of 12
months for borrowers other than those involved in farm credit. However,
financial institutions have the flexibility to extend this period as per their
own policies.
It is important
to note that compromise settlements and technical write-offs should not violate
any other prevailing statutes. Compliance with all applicable legal provisions
is crucial to ensure the integrity and legality of the settlement process. If
there are ongoing recovery proceedings before a judicial forum, any settlement
reached with the borrower must be subject to obtaining a consent decree from
the relevant judicial authorities. This ensures that settlements align with the
legal process and receive proper validation.
By implementing
this framework, financial institutions can streamline the process of resolving
NPAs. It provides clear guidelines, delegation of powers, reporting mechanisms,
and oversight by the board. Ultimately, this framework helps financial
institutions navigate the challenges of NPAs more effectively, safeguard their
financial stability, and optimize the recovery of distressed assets.
