In detailed guidelines the central bank asked all regulated entities (REs) to put in place board-approved policies for OTS with borrowers as well as for technical write-offs which will lay down the process, precedent and a graded framework for staff accountability with timelines.
The settlement policy must also contain permissible sacrifice for various categories of exposures after taking into account the realisable value of collateral, where available. “The objective shall be to maximise the possible recovery from a distressed borrower at minimum expense, in the best interest of the RE,” RBI said.
Banks have to ensure that the delegation of power for such settlements rests with an authority which is at least one level higher in hierarchy than the authority which sanctions the credit exposure. No official part of sanctioning the loan can be part of the approving the proposal for compromise settlement of the same account. Settlements in respect of fraud or wilful defaulters will mandatorily require approval of the board.
Compromise settlements where the time for payment of the agreed settlement amount exceeds three months shall be treated as restructuring. Compromise settlements and technical write-offs approved by the MD & CEO or board level committee would be reported to the board.
Borrowers which enter into a OTS shall need to go through a cooling period of a minimum 12 months in case of farm credit exposures before the REs can assume fresh exposures to such borrowers. In case of ongoing judicial recovery proceedings against any borrower, the settlement with will have to be okayed by judicial authorities, RBI said.Deputy governor in charge of regulations, M Rajeshwar Rao said the OTS framework has now been extended to urban co-operative banks (UCBs) also which was not the case earlier. Commercial banks are increasingly depending on OTS with defaulters for recovery amidst judicial and procedural delays in other routs like the Insolvency and Bankruptcy Code (IBC).