Comprehensive Framework for Compromise Settlements and Technical Write-offs
Reserve Bank of India · Department of Regulation · Circular ID: RBI/2023-24/40 (DOR.STR.REC.20/21.04.048/2023-24)
AI Summary & Core Structural Roadmap
Regulatory Rationale
To optimize the recovery velocity of distressed assets and provide cross-institutional harmonisation, the RBI has deployed a unified operational framework for handling **Compromise Settlements** and **Technical Write-offs** applicable to all Regulated Entities (REs), including Commercial Banks, Cooperative Banks, Financial Institutions, and NBFCs. This framework standardizes accounting treatments, structures strict data-reporting workflows, and mandates explicit governance checks for complex default profiles.
Key Compliance Directives
- Mandatory Board-Approved Policies: REs must establish clear, transparent board policies outlining prerequisites for settlements, including minimum aging criteria, collateral value degradation, and structured staff accountability assessments.
- Strict Delegation of Power Covenants: Approvals for compromise arrangements must be assigned to an authority at least **one level higher** in hierarchy than the authority that originally sanctioned the loan. Sanctioning officials are entirely disqualified from participating in settlement approvals.
- Fraud and Wilful Default Processing: REs are explicitly authorized to finalize compromise settlements or process technical write-offs for fraud or wilful default accounts without prejudicing ongoing criminal proceedings against the debtors. Such settlements require absolute **Board-level approval**.
Core Definitions & Rules Matrix
| Framework Component | Regulatory Definition / Parameter | Prudential Treatment Constraint |
|---|---|---|
| Compromise Settlement | Negotiated cash arrangement to fully settle a lender's claim, potentially involving a sacrifice. | Arrangements involving partial or delayed multi-stage settlements fall under "Restructuring" frameworks. |
| Technical Write-off | Writing off an NPA strictly for ledger accounting purposes without waiving legal recovery claims against the debtor. | Partial write-offs require residual exposure provisioning and classification calculations to reference original exposures. |
| Cooling-off Period | Mandatory lock-out window before a lender can take fresh credit exposure on a settled borrower. | Minimum floor of 12 months for non-farm credit exposures. Farm credit metrics are decided via board policy. |
Oversight and Reporting Mechanics
Lenders must verify that internal management reporting platforms capture these parameters at minimum:
- Quarterly and year-on-year volume trends for accounts undergoing settlement or write-offs.
- Isolated data tracking and audit lines for settlements involving fraud, red-flagged, or wilful default classifications.
- Post-write-off recovery success metrics to evaluate collection efficiency in technically written-off registries.
Processed Transcribed Source Text Content
RBI/2023-24/40
DOR.STR.REC.20/21.04.048/2023-24
June 08, 2023
Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)
Primary (Urban) Co-operative Banks/State Co-operative Banks/ Central Co-operative Banks
All-India Financial Institutions
Non-Banking Financial Companies (including Housing Finance Companies)
Madam/Dear Sir,
Framework for Compromise Settlements and Technical Write-offs
Please refer to the Statement on Developmental and Regulatory Policies released on June 8, 2023, announcing the issuance of a comprehensive regulatory framework governing compromise settlements and technical write-offs.
1. Board-approved Policy: Regulated Entities (REs) shall put in place Board-approved policies for undertaking compromise settlements with the borrowers as well as for technical write-offs. Compromise settlement for this purpose shall refer to any negotiated arrangement with the borrower to fully settle the claims of the RE against the borrower in cash; it may entail some sacrifice of the amount due from the borrower on the part of the REs with corresponding waiver of claims of the RE against the borrower. Technical write-off refers to cases where non-performing assets remain outstanding at borrowers’ loan account level, but are written-off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.
2. The Board approved policy shall comprehensively lay down the process to be followed for all compromise settlements and technical write-offs, with specific guidance on the necessary conditions precedent such as minimum ageing, deterioration in collateral value etc. The policies shall also put in place a graded framework for examination of staff accountability in such cases with reasonable thresholds and timelines as may be decided by the Board.
3. Delegation of Power: The policy shall also cover the delegation of powers for approval/sanction of compromise settlements and technical write-offs. Delegation of power for such approvals must rest with an authority which is at least one level higher in hierarchy than the authority vested with power to sanction the credit exposure. Any official who was part of sanctioning the loan shall not be part of approving the proposal for compromise settlement of the same loan account.
4. Proposals for compromise settlements in respect of debtors classified as fraud or wilful defaulter shall require approval of the Board in all cases. REs may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.
5. Cooling Period: In respect of borrowers subject to compromise settlements, there shall be a cooling period as determined by the respective Board approved policies before the REs can assume fresh exposures to such borrowers. Provided that the cooling period in respect of exposures other than farm credit exposures shall be subject to a floor of 12 months.
6. Repeal of Legacy Circulars: These instructions come into force with immediate effect and stand to repeal older layout instructions issued on July 28, 1995, November 30, 2007, and June 21, 2010.