Reserve Bank of India issued their circular DOR.STR.REC.20/21.04.048/2023-24 dated June 08, 2023addressed toall Regulated Entities (RE) coming under RBI on Framework for Compromise Settlements and Technical Write-offs.
The preamble of RBI circular states, "The Reserve Bank of India has issued various instructions to regulated entities (REs) regarding compromise settlements in respect of stressed accounts from time to time, including the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019 ("Prudential Framework"), which recognises compromise settlements as a valid resolution plan. With a view to provide further impetus to resolution of stressed assets in the system as well as to rationalise and harmonise the instructions across all REs, as announced in the Statement on Developmental and Regulatory Policies released on June 8, 2023, it has been decided to issue a comprehensive regulatory framework governing compromise settlements and technical write-offs covering all the REs."
Reserve Bank initiative to come out with a FRAME WORK FOR COMPROMISE SETTLEMENTS AND TECHNICAL WRITE OFFS applicable to all banks and financial institutions coming under the regulation of RBI is a welcome step which if implemented diligently without fear, favour, prejudice and bias and uniformly and not arbitrarily or unilaterally would improve recovery of dues without the hassleof legal proceedings and without waste of time since it is also being a valid resolution plan.It seems to be easily implementable to provide further "impetus to resolution of stressed assets in the system as well as to rationalise and harmonise the instructions across all REs."
The intention behind the said circular is for an amicable settlement of all outstanding dues of stressed accounts for mutual benefit by creating a win-win situation with the mutual understanding and co-operation between the lender and borrower based on TRUST, FAITH, HOPE and UNDERSTANDING for the veritable realisation of objectives of the settlement arrived at through best of intentions and purest of motives keeping the relationship intact forever. If only the banker and the borrower can understand their respective roles and duties and responsibilities and how are they interconnected with their mutual welfare in their correct perspectives, then only can there be an everlasting enduring and endearing relationship and solving problems for mutual benefit and progress. The Lender and the borrower should firmly believe in this dictum.
One of the best ways of solving the delinquent nonperforming asset problem is by way of compromise settlement which will amicably find solutions to the resolution of nonperforming asset for mutual benefit of the lender and the borrower avoiding the pit falls of financial duress and the biggest existential threat to entrepreneur sustenance and organisational survival. But the success of compromise settlement depends on understanding and arriving at the basic and important norms of settlement.
KYC norms have been introduced in the financial sector. But what is important is that knowing the customer and understanding the customer are two different things. In fact understanding the customer is more important than mere knowing the customer since to understand and to be understood are the basis of human relationship. It is built on the power of communication. It is communication that wins over people and creates an endearing and enduring interpersonal relationship. Those who have mastered its effective use can change their own experience of the world and the world's experience of them. All behaviour and feelings find their original roots in some form of communication. Those who are successful know to use this power effectively. Effective communication leads to understand the situations in their correct perspectives and prospective. It paves to way to accept the realities of the situations under the prevailing environment. Acceptance makes way to finding practical and pragmatic solutions leading to mutually beneficial settlements.
The success of compromise proposal depends on the following banking norms and humanitarian considerations
1. The common perception of the banks and financial institutions regulated by RBI is that the borrowers are exclusively responsible for creating Non Performing Assets (NPAs). But this perception is wrong. Sound comes only when two hands are clapped. Similarly the creation of NPA accounts is on account of wrong doings of both the banks and financial entities and the borrowers.It is universal truth that nobody is perfect. Everyone has their own faults and frailties, bias and prejudices. Banks and financial institutions also come under such internal inadequacies and service deficiencies as they are manned and managed by human beings. Understanding such inadequacies found in the banking and financial system, RBI issued a special circular DBS. FrMC. No. BC. 1 /23.04.01D/2004-05 dated August 7, 2004 addressed to The Chief Executives All Commercial Banks onDeficiencies found in sanctioning of loans and monitoring of borrowal accounts by banks / Financial Institution where in it states, "it has been observed that in many reported frauds, there were inherent weaknesses at the stages of sanction and post disbursement follow up of advances which ultimately culminated in perpetration of frauds in the accounts". Thus it very clear and without any ambiguity that the banks and financial institutions also are responsible to create nonperforming assets (NPA). Compliance of RBI directives and statutory rules will alone pave the way for an amicable settlement upholding the Constitutional rights of EQUALITY BEFORE LAW. Besides, a reference to RBI circular No. DoS. CO.PPG./SEC.02/11.01.005/2020-21 dated September 11, 2020 on Compliance functions in banks and Role of Chief Compliance Officer (CCO) gives better idea about implementation of compliance function.
2. The first step is to ensure the banks and financial institutions have complied with all the RBI guidelines and other statutory rules as enumerated by RBI in their compliance circular.
3. The reasons that led to the account being classified as NPA be analysed to make sure whether the defaulter borrower is a wilful defaulter or defaulter due to circumstances beyond their control. If the borrower is a wilful defaulter or a fraudster, no remedy is available to him. If the defaulter is a victim of circumstances beyond his control, all efforts should be taken to take the account out of the NPA status or to offer a reasonable, affordable and implementable compromise settlement without much loss and damages to the borrower so that the borrower can also survive.
4. The right of the bank to recover their dues is derived out of their duties and responsibilities to be performed first and their duties and responsibilities being compliance of RBI guidelines and other statutory provisions as substantiated under their compliance circulars.
5. Other important features are as stated below.
(i) Whether the borrower has the capacity to pay the settled amount for which the banks are mandated to arrive at a realistic cash flow.
(ii) The repayment schedule is to be fixed depending on the realistic cash flow for the fulfillment of the task without any impediment.
(iii) The rate of interest to be charged should be affordable.
(iv) All types of concessions possible should be made available since the effectiveness of settlement proposal also depends on concessions to be given.
(v) The biggest impediment to the compromise settlement is valuation of collateral securities particularly immovable assets. If settlement is to be based on the value of the collateral securities in the form of immovable assets, then the equity of the settlement will be lost and the defaulted borrower who opts for compromise settlement will be a huge loser. Any settlement based on the value of collateral security alone will not be fair and equitable settlement.The most important aspect is that the outstanding liability to be settled in most of the cases is the accrued and accruing interest on the loan. Once the account is classified as NPA the cash generation is almost stopped and the activities will come to a standstill but the interest will go on mounting with penal interest added to along with all other charges. Hence, the recover should be done with a human touch.
(vi) The most important aspect is that the banks and financial institutions should not behave like real estate agents or collection agents to recover the debts devoid of any sensitivity and transparency.
(vii) Operating any business in today's economic environment means managing cash flow. Companies looking only at their earnings and not managing cash flow cannot and will not survive in today's economy where short-term operational loans are not often readily available. Hence managing a very positive cash flow is an essential and an inevitable necessity for any business organisation.
(viii) Any compromise settlement or the recovery should not lead to the violation of fundamental rights, constitutional rights, human rights, consumer rights etc. The motto of recovery should be "live and let live".
(ix) In this connection a reference may kindly be made to RBI circular DBR.No.BP.BC.45/21.04.048/2018-19 June 7, 2019 Prudential Framework for Resolution of Stressed Assetswhere in it states under Para No. 13 at the foot note {7} "Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower's financial difficulty, grants concessions to the borrower.Restructuring would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of payment period / payable amount / the amount of instalments / rate of interest; roll over of credit facilities; sanction of additional credit facility/ release of additional funds for an account in default to aid curing of default / enhancement of existing credit limits; compromise settlements where time for payment of settlement amount exceeds three months."
6. The entrepreneur also has invested his capital and self-made assets and margin money in his business and he is also a job provider. Hence, while recovering the dues, he and his employees should not be deprived of their livelihood and thrown into the streets overnight.
7. A reference may be made to the notification issued by Press Information Bureau, Government of India, Ministry of Micro, Small & Medium Enterprises dated 29.05.2015 on Framework for Revival and habilitation of MSMEs which consists of following features.
(i) Identification of incipient stress.
(ii) Committees for Distressed Micro, Small and Medium Enterprises.
(iii) Corrective Action Plan (CAP) by the Committee.
(iv) Options under Corrective Action Plan (CAP).
(v) Restructuring Process.
(vi) Prudential Norms on Asset Classification and Provisioning.
(vii) Wilful Defaulters and Non-Cooperative Borrowers.
(viii) Review: In case the Committee decides that recovery action is to be initiated against an enterprise, such enterprise may request for a review of the decision by the Committee within a period of fifteen working days from the date of receipt of the decision of the Committee. Application filed under this section shall be decided by the Committee within a period of thirty days from the date of filing and if as a consequence of such review, the Committee decides to pursue a fresh corrective action plan for revival of the enterprise shall apply accordingly.
It is expected that the above Framework help the lenders and debtors in revival and rehabilitation of enterprises and shall unlock the potential of particularly MSMEs.
8. Supreme Court judgment in the matter of Shiva Shakti Sugars Ltd vs. Shree Renuka Sugars Ltd (CIVIL APPEAL NO. 5041 OF 2014, 5042 OF 2014 and 5043 OF 2014, judgment dated 09.05.2017) states as per the following very important extracts highlighting "economic interest competes with the rights of people, the courts need to take a balanced approach."
The top court said. "First duty of the court is to decide the case by applying the statutory provisions," the court further said, "However, on the application of law and while interpreting a particular provision, economic impact / effect of a decision, wherever warranted, has to be kept in mind."The Apex Court observes again, "38) Even in those cases where economic interest competes with the rights of other persons, need is to strike a balance between the two competing interests and have a balanced approach.
That is the aspect which has been duly taken care of in the instant case, as would be discernible from the concluding paragraph of this judgment."
"39) Although law and economics traces back to the period of Jeremy Bentham3, i.e. 18th century, in the last few decades, the interplay between law and economics has gained momentum throughout 3 Utilitarian Theory, which is essentially economic theory."
The aforesaid judgment has been quoted here because the borrowers' cases are coming under "economic impact" on account of the fact that even if a restructuring is to be initiated the accounts cannot be retrieved from the NPA status. Since many of the borrowers are coming under the category of MSME, the notification issued by Press Information Bureau, Government of India, Ministry of Micro, Small & Medium Enterprises dated 29.05.2015 on Framework for Revival and habilitation of MSMEs will be applied under "Options under Corrective Action Plan (CAP): The options under Corrective Action Plan (CAP) by the Committee may include: (i) Rectification - regularize the account so that the account does not slip into the non-performing asset (NPA) category, (ii) restructuring the account if it is prima facie viable and the borrower is not a wilful defaulter, and (iii) recovery - Once the first two options at (i) and (ii) above are seen as not feasible, due recovery process may be resorted to." One of the very important recovery process is resorting to One Time Settlement (OTS).
9. It is the universal truth that construction takes its own time whereas destruction is instant. Construction brings in investments through which development and progress and prosperity are achieved but destruction nullifies all achievements. This is very much true in any banking lending and recovery procedures and proceedings. A dispassionate and without prejudice view if taken about the objective of the banks and borrower entrepreneurs, it is evident that their activities are complimentary to each other and not contradictory. They are interdependent on each other and not independent of each other. They are supportive of each other and not opposing each other. Their sustenance and progress depend on each other and not on weakening each other. They have necessarily and inevitably to work together unitedly and in unison to achieve their common objective of building up a robust economy making the nation a foremost global economic power. Therefore any recovery proceedings undertaken by the bank should ensure that the interest of the bank and the borrower should not be jeopardized. Through mutual understanding, cooperation between the lender and the borrower and for mutual benefit, they should jointly explore new opportunities for development and progress and stability with sincerity of purpose and purity of heart and with the objective of working together unitedly and in unison to create a robust economy for the nation. The only way the bank and the borrower can achieve their common objective mutually acceptable solution of an amicable settlement is through compromise settlement to create a win-win situation.
10. "Economic policymakers require an enormous dose of humility, openness to various alternatives (including the possibility that they might be wrong), and a willingness to experiment," Raghuram Rajan, ex- Governor of Reserve Bank of India wrote in a column on the Project Syndicate website. Regarding NPA recovery he said, "We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present. Recovery should be focused on efficiency and fairness – presenting the value of underlying assets and jobs where possible, even while redeploying unviable assets to new uses and compensating fairly. All this should be done while ensuring that contractual priorities are met. The system has to be tolerant of genuine difficulties while coming down on mismanagement or fraud," he said. The then RBI Governor had given the clarion call on a positive note to the banks and financial institutions with regard to the recovery of dues.
11. That Supreme Court of India in the matter of Mardia Chemicals judgment states,(Mardia Chemicals Ltd., v. Union of India reported in AIR 2004 Supreme Court 2371 : (2004) 4 S.C.C. 311), "Liquidity of finances and flow of money is essential for any healthy and growth-oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved." It is thus obvious that whatever actions that the banks and financial institutions initiate to recover the dues should not be in derogation of the rights which are guaranteed to the people under the constitution coming under the purview of Fundamental Rights and also should not infringe in to the Human Rights and Principles of Natural Justice.
The judgment further states while upholding the validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(54 of 2002) is as follows:"The financial institutions, namely the lenders owe a duty to act fairly and in good faith. There has to be a fair dealing between the parties and the financing companies/institutions are not free to ignore performance of their obligation as a party to the contract. They cannot be free from it. Irrespective of the fact as to whatever may have been held in decisions of some American Courts, in view of the facts and circumstances and the terms of the contracts and other details relating to those matters, that may or may not strictly apply, nonetheless, even in absence of any such decisions or legislation, it is incumbent upon such financial institutions to act fairly and in good faith complying with their part of obligations under the contract. This is also the basic principle of concept of lender's liability. It cannot be a one-sided affair shutting out all possible and reasonable remedies to the other party, namely, borrowers and assume all drastic powers for speedier recovery of NPAs. Possessing more drastic powers calls for exercise of higher degree of good faith and fair play. The borrowers cannot be left remediless in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always plead in defense deficiencies on the part of the banks and financial institutions."
12. Last but not the least what the author advocates is, "Conscience Cum Conscious Banking" will usher in an environment of goodwill and mutual respect among banks / financial institutions and the customers without the feeling of being abused, shamed and threatened. It also inculcates a sense of belonging among the executives, employees and the customers leading to understanding the respective roles and mutual obligations and contributions towards the health and wealth of economy and the society alike. Further, they would hold themselves and each other accountable for adhering to some set of agreed-upon values and ethics and for working toward an agreed-upon vision. Deviations and errors would be considered as an opportunity for learning and growth, rather than an excuse for blame and punishment. This does not mean that there won't be any problems. In an uncertain and volatile business environment nobody can predict precisely the future outcome. But with trust and mutual understanding based on the culture, values and ethics that they developed, timely actions will be initiated tide over the problems and to achieve the goals of mutual welfare keeping the national interest above all. A Conscience Cum Conscious Banking will create an everlasting relationship between the bank and the customer with mutual help and respect which will also enable Recovery with Human Touch.
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