New Delhi: Bank unions have opposed the Reserve Bank of India (RBI)’s move to allow lenders to settle loans of wilful defaulters under compromise settlement, PTI reported.
“As key stakeholders in the banking industry, we have always advocated for strict measures to address the issue of wilful defaulters,” All India Bank Officers’ Confederation (AIBOC) and All India Bank Employees Association (AIBEA) said in a joint statement.
Allowing compromise settlement for accounts classified as fraud or wilful defaulters is an affront to the principles of justice and accountability, the statement said, adding, it not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations.
Compromise settlement refers to any negotiated arrangement with the borrower to fully settle the claims of the regulated entity against the borrower in cash. It may entail some sacrifice of the amount due from the borrower on the part of the regulated entity with the corresponding waiver of claims of the regulated entity against the borrower to that extent.
The RBI also directed banks to have a minimum cooling period of at least 12 months before making fresh exposures to borrowers who had undergone compromise settlements. This means that a wilful defaulter can get a new loan after 12 months of executing a compromise settlement, the Indian Express reported.
An official at the central bank had also raised concerns over the RBI’s move.
The official told the newspaper: “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.”
The bank unions said that the sudden change in the framework by the RBI to grant compromise settlements to wilful defaulters will not only lead to the erosion of public trust in the banking sector but also undermines the confidence of depositors.
It fosters an environment where individuals and entities with the means to repay their debts choose to evade their responsibilities without facing appropriate consequences, the joint statement said.
Such leniency serves to perpetuate a culture of non-compliance and moral hazard, leaving banks and their employees bearing the brunt of the losses, it said.
It added that it is worth noting that wilful defaulters have a significant impact on the financial stability of banks and the overall economy.