Thomas Franco

Random Reflections

The RBI circular dated 8th June 2023, permitting public sector banks, private banks, small finance banks, co-operative banks and non-banking finance companies to have compromise settlements with willful defaulters and frauds generated sharp response from bank trade unions and associations, people’s commission on public sector and public services, leading newspapers, magazines and TV channels.

Seeing the emerging public opinion against the RBI, the central bank has issued certain clarifications in the form of FAQs – Frequently Asked Questions.

A detailed analysis of the circular, its annexures, and circulars referred to and intentionally not referred to, is simply an attempt to hide pumpkin inside a small bowl of rice (a Tamil proverb). RBI is trying to defend its notification saying it’s not new but a reiteration of 15 years old instructions.

If the instructions were 15 years old why were the banks not following it for so long? Why now, large willful defaulters and fraudsters given a beautiful exit route to become gentlemen instead of criminals?

Let’s analyze RBI’s clarifications:

By quoting a letter purportedly written by a DGM RBI to the Indian Banks Association, RBI tries to prove that this compromise has been in practice for 15 years. Why this letter was not followed by a notification to scheduled Commercial banks which is the practice? Why IBA did not issue any detailed circular permitting compromise settlements with willful defaulters and fraudsters in 2007 itself?

The FAQs quote Master circular on Willful defaulters dated July 1, 2015, which states that lenders agreeing to borrowers classified as willful defaulters and states that such cases need not be reported to Credit Information Companies provided inter alia that the borrower has fully paid the amount.

A closer look at the circular shows that the instructions were to deal with willful defaulters very strictly. It also quotes Joint Parliamentary Committee’s recommendation and it has given an exception to borrowers with loans outstanding up to Rs.25 lakhs only. It does not cover fraud. It also says the loan has to be fully repaid and not a reduced amount.

How can this be applied to everyone, including large corporates with huge outstanding sums like Rs.28000 cr in the case of ABG shipyard? The present circular does not talk about full repayment of principal and interest!

A few years back Vijay Mallya offered to repay the full principal which banks did not accept because RBI did not permit it. He is a willful defaulter and fraud. Now, his loan can be settled through a compromise with reduced payment.

The master circular on frauds dated 1st July 2016 is exhaustive and says, as its purpose, “These directions are issued with a view to providing a frame work to banks enabling them to detect and report frauds early and taking timely consequent actions like reporting to the investigative agencies so that fraudsters are brought to book early, examining staff accountability and do effective fraud risk management. These directions also aim to enable faster dissemination of information by the RBI to banks on the details of frauds, unscrupulous borrowers and related parties, based on banks reporting so that necessary safeguards/preventive measures by way of appropriate procedures and internal checks may be introduced and caution exercised while dealing with such parties by banks.”

It does not mention compromise settlement as the purpose of the circular.

Para 18.12 of this circular– Penal Measures for fraudulent borrowers under 8.12.2 says “No restructuring or grant of additional facilities may be made in the case of RFA or fraud Accounts. However, in case of fraud/malfeasance where the existing promoters, and the borrower company is totally delinked from such erstwhile promoters/management, banks and JLF may take a view on restructure of such accounts based on their viability, without prejudice to the continuance of criminal action against erstwhile promoters/management.

As per, 8.12.3. “No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued.”

So this again is an exception where the promoters/management who are the fraudsters are totally removed from the company whereas the 8th June 2023 circular provides for omnibus compromise with every fraudster.

Now it says it is up to the banks to decide! Once RBI provides for compromise the fraudster and willful defaulters will be happy to negotiate, so how would the banks refuse?

The second FAQ clarification is welcome as it reiterates both master circulars on frauds and willful defaulters. Both the circulars do not provide for compromise settlement except as an exemption in rare cases and insist on full repayment.

The third FAQ is welcome because it has brought back 5 years cooling period instead of one year.

The fourth FAQ is still worrisome. It provides for compromise settlement with full faith on the boards. Boards do not have officer Director and employee Directors who are considered to be watchdogs, as they represent majority associations and unions. Most of the boards are not even filled fully. Many of the so-called independent directors are political representatives. The MDs are also political appointees now. Six of the 12 public owned banks do not have non-executive chairmen. The same boards have given loans to large corporates that are frauds and willful defaulters.

This is like giving a loaded gun to the hands of the robber.

The fifth FAQ is also not justifiable. Restructuring which was stopped in 2012 has been brought back in 2019 to show that NPA is not increasing especially in MUDRA loans and corporate loans. Where are the 42 crore entrepreneurs financed using depositors’ money? The compromise settlement can become a freebie for them and give political dividends in the next election for which RBI is paving the way.

Why not fulfil the demand of the farmers for a one-time write-off as they have suffered due to flood or drought or un-remunerative prices? Why not write off education loans to youth who are unemployed or under-employed? They are selling their assets to repay loans whereas the criminals can now arrive at a compromise!

The sixth FAQ proposes to have a compromise instead of a prolonged wait. This is like some judge asking a victim to marry the rapist. There are legal ways to recover even if delayed.

The 7th FAQ on technical write-off is a humbug. Many reports have shown that not even 15% is recovered in the technical write-off accounts.

The 8th FAQ on what the new instruction tries to achieve is only a cover-up. The question is if these are already existing instructions why they were not implemented by banks for 15 years?

Why this sudden move just one year before the elections?

The RBI can issue instructions only in the larger interest of the public or in the interest of the depositors. This is neither in the public interest nor in the depositor’s interest, hence it is illegal and should be withdrawn immediately.

All Banks and NBFCs will suffer as genuine borrowers will also demand concessions and the banking system will be at grave risk.

Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.

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