Government & IBBI Oppose RBI Circular Allowing Banks to Settle With Willful Defaulters

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The Indian government is not in favor of the RBI’s recent circular that allows banks to settle with willful defaulters and fraudsters. The government believes that this will delay debt recovery and lead to erosion of asset values.

The Insolvency and Bankruptcy Board of India (IBBI) is also concerned about the reduced rate of loan recovery under the IBC and reckons that the delay in the resolution process is one of the reasons for it.

The government and the IBBI are urging banks to initiate insolvency proceedings at the right time and to follow the IBC process without delay. They also want banks to appoint more competent resolution professionals.

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The RBI’s rationale for extending the compromise settlement framework to willful defaults is to prevent erosion of asset value. However, the government and the IBBI believe that this will have the opposite effect.

The compromise settlement system has long been available to banks as one of the ways to tackle non-performing assets. But the government and the IBBI believe that it should be used efficiently and only in cases where it is in the best interests of the creditors.

They also stressed that the IBC is meant to be a last resort and that expecting the same level of recovery from it as from other debt recovery processes would be illogical.

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