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ACCORDING to the RBI circular dated June 8, 2023, willful defaulters and companies involved in fraud have the option to pursue a compromise settlement with banks and non-banking finance companies. This circular introduces certain provisions that should be noted. In Para 6(ii) of the circular, it is mentioned that proposals for compromise settlements concerning debtors classified as fraud or willful defaulters, as permitted under clause 13 of the annex, will require the approval of the Board in all cases. Furthermore, as stated in Para 13 (Annex), regulated entities are permitted to undertake compromise settlements or technical write-offs for accounts categorized as willful defaulters or fraud, without impacting the ongoing criminal proceedings against these debtors.

Now the RBI has issued a FAQ on this circular hiding certain facts and misquoting earlier instructions. For example a letter dated May 10, 2010 is a letter by a DGM and not a circular and it was not followed by circular instructions. The July 1, 2015 Master circular only gives a concession to defaulters whose loan is below Rs 25 lakhs and is fully repaid. June 7, 2019 circular does not allow restructuring but June 8, 2023 circular permits that. This raises the question of how a compromise can be achieved if restructuring is not allowed. By issuing a FAQ which actually is hiding more facts, RBI is degrading itself.

Traditionally, willful defaulters and individuals involved in fraudulent activities were regarded as having committed criminal acts, leading to the filing of legal cases against them. The recent circular issued by the Reserve Bank of India (RBI), clearly on the directives of the government, aims to provide certain safeguards and mechanisms for compromise settlements.

Since 2014, the Government of India (GoI) has not appointed officer directors and employee directors in public-owned banks, resulting in boards that have political supporters of the ruling party. Surprisingly, the RBI has not raised concerns regarding the non-appointment of officer and employee directors.

This situation raises questions about how these boards will handle and approve compromise settlements. Unlike officers and employees, board members lack direct accountability. Furthermore, the absence of watchdogs from associations and unions has made the decision-making process opaque, and even the outcomes of these decisions are not accessible under the Right to Information (RTI) Act.

It is worth noting that once a compromise settlement is reached, the related cases will be closed, leaving room for speculation about the fairness and transparency of the entire process.

The implications of these developments on the banking system are significant. Middle-class depositors, who constitute a substantial portion of the deposit base, may face the brunt of the situation. Their hard-earned savings will be utilised to write off loans, resulting in only minimal recoveries. Meanwhile, individuals with a history of default and fraudulent activities may once again gain access to loans. Furthermore, their creditworthiness, as reflected by their CIBIL rating, could improve due to data cleansing.

Consequently, responsible borrowers who consistently repay their loans may find themselves in a challenging position and may be more prone to default. This adverse trend could have a detrimental effect on banks' financial stability. With the exception of borrowers who have offered substantial collateral, there is a higher probability of increased defaults, leading to an anticipation of loan write-offs.

UNMASKING THE BENEFICIARIES

FROM GUJARAT'S DEFAULTERS

It is worth considering who stands to benefit from this situation. Reports from 2018 indicated that out of 5,600 wilful defaulters, approximately 15 per cent were from Gujarat. These defaulters collectively owed Rs 8,500 crores out of the total Rs 58,000 crores owed by all defaulters. The potential beneficiaries of compromise settlements may largely consist of individuals belonging to this group.

Top 50 Wilful Defaulters (2022) as per the RBI Data

It is notable that several prominent willful defaulters, such as ABG Shipyard's Rishi Agarwal and Winsome Diamonds' Jatin Mehta, have close associations with influential figures. This proximity to the corridors of power or their ability to escape jurisdiction has enabled them to exploit the situation. For instance, Rishi Agarwal, who defrauded 28 banks for a staggering amount of Rs. 23,000 crores, now has the opportunity to settle for a fraction of the sum through a compromise agreement.

Similarly, Jatin Mehta, who is a close relative of Adani and fled the country, may also have the chance to return under favorable conditions. Vijay Mallya, MehulChoksi, Nirav Modi, and other high-profile individuals involved in financial irregularities could also potentially make a return. This situation contrasts with earlier announcements by the Finance Minister, who had promised to bring these fraudsters back to face legal consequences. However, instead of being held accountable for their actions, they may now be rewarded with leniency.

These developments raise serious concerns about the integrity of the system and the potential influence of these individuals by funding election campaigns.

TRIBUNALS FACILITATING

FRAUDSTERS & DEFAULTERS

Furthermore, it is our concern that National Company Law Tribunals and Debt Recovery Tribunals are aiding defaulters and fraudsters without explicitly declaring them as such.

The introduction of the Insolvency and Bankruptcy Act in 2016 faced opposition from the Left, who argued that it would primarily benefit defaulters and their collaborators rather than the banks. The concerns raised by the Left have been echoed by the Parliament Standing Committee, which strongly criticized the National Company Law Tribunals (NCLTs) for their perceived support to corporates under the guise of substantial debt reduction (haircuts), often reaching 80 per cent or more. The Committee explicitly highlighted the nexus between Insolvency Professionals, NCLTs, and banks.

Over the past decade, the reduction in non-performing assets (NPAs) due to write-offs amounts to a staggering Rs 13,22,309 crores. Banks receive capital to facilitate this process of diverting funds to a select group of wealthy corporates. As stated in Parliament, approximately 80 per cent of the NPAs are attributed to large corporates, who, in turn, support political parties through electoral bonds and other means.

The recent provision for compromise settlements with willful defaulters and fraudsters provides an opportunity for criminals to exploit the system further. The magnitude of fraud is alarming, with banks reporting 13,530 cases in 2023 alone. In 2021 and 2022, public-owned banks reported frauds amounting to Rs 97,245 crore in accounts with outstanding amounts exceeding Rs 100 crore. Over the past five years, banks have reported 983 frauds above Rs 100 crores, totaling Rs 3,76,400 crores. The question arises: Is it justified to pursue compromises with these criminals?

This is clear loot.

FINANCE MINISTER'S ROLE

AND TROUBLING PRACTICES

There is going to be another bigger political gain. It is noteworthy that over the past nine years, banks have disbursed Mudra Loans to a substantial number of borrowers, reaching a significant milestone of 420,997,763 individuals (42 Crore) as of June 9, 2023. The cumulative loan amount extended under the Mudra Loan scheme stands at a staggering Rs 2,405,753 crores.

There are concerns regarding the role of the finance minister in setting targets for government-owned banks, which are also compelled to lend to non-banking finance companies (NBFCs) for on-lending and co-lending purposes. In some instances, local party members associated with the ruling party inform borrowers that these loans are gifts and do not need to be repaid. Consequently, the non-performing asset (NPA) ratio is increasing, leading banks to write off 25 per cent of the loans and claim the remaining 75 per cent from the Credit Guarantee Fund. Unfortunately, such defaulters' CIBIL scores are impacted; however, they can now make a small payment to clear their CIBIL score and borrow again.

Several articles have shed light on loans granted under government-sponsored schemes, revealing that these loans are not funded by the government but rather by customer deposits. Additionally, there have been claims that these schemes played a role in the Bharatiya Janata Party's (BJP) success in the Uttar Pradesh elections.

Through compromise settlements and write-offs, banks are able to present clean balance sheets with high profits, while depositors receive lower interest rates and face increased bank charges. Similarly, small borrowers experience higher interest rates. These circumstances could make it easier to justify privatisation efforts.

The utilisation of the RBI as a tool for political gain is a violation of the law, raising concerns about the impartiality and integrity of the institution.

According to Section 21 of the Banking Regulation Act, the Reserve Bank of India (RBI) has the power to control advances made by banking companies, which reads, “Power of Reserve Bank to control advances by banking companies (1) where the Reserve Bank is satisfied that it is necessary or expedient in public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally”.

The current compromise settlement of loans for willful defaulters and fraudsters does not serve the public interest or the interests of depositors. It is a violation of the law and should be withdrawn accordingly.

The All India Bank Officers Confederation, All India Bank Employees Association, and Bank Employees Federation of India have strongly criticized the RBI and demanded the withdrawal of these instructions. They argue that failure to do so will negatively impact depositors, increase loan defaults, and erode faith in the banking system, potentially leading to a collapse. It is imperative for political parties and the public to rally against the misuse of banks for political gains, especially considering the interests of over 100 crore small depositors.

Thomas Franco is the former general secretary of the All India Bank Officers Confederation

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