RBI Compromise Settlement Framework: June 2023 Guidelines, Cooling-Off, and Rules

Applicable lenders

• Scheduled commercial banks (public sector, private sector, and foreign banks).
• Small Finance Banks (SFBs) and Regional Rural Banks (RRBs).
• Urban Co-operative Banks (UCBs), State Co-operative Banks, and District Central Co-operative Banks.
• All India Financial Institutions (NABARD, EXIM Bank, SIDBI, NaBFID).
• Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs).

Applicable borrowers

• Any borrower, commercial enterprise, or guarantor seeking a negotiated debt compromise or technical write-off.
• Borrowers classified as wilful defaulters or fraud accounts entering into compromise settlements.

What is covered

• Mandatory requirements for Board-approved compromise settlement policies.
• Objective valuation methodology and Net Present Value (NPV) calculation of realisable collateral.
• The 12-month statutory cooling-off period for fresh credit facilities.
• Legal protections and limits regarding wilful defaulters and fraud accounts.
• The legal difference between a "Technical Write-Off" and a "Compromise Settlement".

What is excluded

• Restructuring of standard or performing loans (governed by separate prudential frameworks).
• Automatic withdrawal of criminal prosecutions, CBI investigations, or police FIRs.

The architecture of the June 2023 RBI framework

[Default & Stress in Loan Account]
   │
   ▼
[Lender Applies Board-Approved Compromise Policy]
   ├─► Must have graded delegated financial authority (e.g., Committee with independent members)
   ├─► Objective formula for calculating "Sacrifice" (Difference between dues and recovery)
   └─► NPV calculation of realisable collateral vs immediate cash offer
   │
   ▼
[Special Categories Scrutiny]
   ├─► Standard NPA: Approved by designated Settlement Committee
   └─► Wilful Defaulter / Fraud: Requires explicit approval from the BANK'S BOARD OF DIRECTORS
       (Mandatory clause: Settlement is strictly without prejudice to criminal FIRs/CBI cases)
   │
   ▼
[Execution of Compromise Settlement]
   ├─► Full payment of settled amount
   ├─► Issuance of No-Dues Certificate & Release of Mortgages within 30 days
   │
   ▼
[Statutory Consequences Triggered]
   ├─► Account tagged as "Settled" / "Post-Write-Off Settled" with Credit Bureaus (CICs)
   └─► Mandatory 12-Month Cooling-Off Period begins across ALL regulated entities

1. Mandatory Board-approved policy requirements

Prior to the June 2023 framework, compromise settlements in India were plagued by fragmented, ad-hoc rules that differed wildly between public sector banks, private lenders, and NBFCs. The 2023 framework standardized the system:

• Every Regulated Entity (RE) must adopt a comprehensive policy approved by its Board of Directors.
• The policy must establish a graded delegation of powers: larger write-offs and concessions cannot be sanctioned by individual branch managers. They require review by an independent Settlement Advisory Committee chaired by a General Manager or Executive Director.
• The policy must define an objective methodology for calculating sacrifice, ensuring that the compromise amount is not arbitrarily reduced to benefit favoured borrowers.

2. The 12-month cooling-off rule for fresh credit

Under Paragraph 5 of the framework, the RBI introduced a strict national cooling-off norm:

• A borrower who undertakes a compromise settlement must undergo a cooling-off period of at least 12 months before any regulated entity can extend fresh credit or non-fund-based facilities.
• When does the 12-month clock start? The cooling-off period begins only from the date on which the borrower pays the final settlement instalment in full and the account is closed.
• Scope of cooling-off: The cooling-off restriction applies to:
  • The principal borrower.
  • Entities and companies where the borrower is a promoter, managing partner, or majority shareholder.
  • Guarantors who participated in the compromise.
• Farm credit exception: Boards of regulated entities are granted discretion to stipulate a shorter cooling-off period for agricultural credit to ensure small and marginal farmers are not excluded from seasonal crop lending.

3. Compromise settlements with Wilful Defaulters and Fraud accounts

Paragraph 8 of the June 2023 circular generated nationwide legal and political debate by allowing banks to enter into compromise settlements with borrowers classified as "wilful defaulters" or "fraud accounts":

• Why the RBI permitted this: In many stalled legacy accounts, banks spent decades litigating against wilful defaulters while recovery remained zero. Allowing a financial settlement enables banks to recover substantial public funds immediately.
• The mandatory legal guardrails:
  1. Board approval mandatory: A compromise settlement with a wilful defaulter or fraud account cannot be sanctioned by lower-level committees; it must be scrutinized and approved by the full Board of Directors of the lending institution.
  2. Zero criminal immunity: Paragraph 8 explicitly provides that compromise settlements with wilful defaulters and fraud entities are strictly without prejudice to any criminal proceedings initiated against the borrower.
  3. The bank is legally prohibited from withdrawing CBI cases, police FIRs, or anti-corruption complaints as part of the compromise agreement. The financial settlement resolves only the civil debt; the criminal trial for cheating, fraud, or diversion of funds continues unaffected.

4. Technical Write-offs vs Compromise Settlements

The framework draws a sharp legal line between two terms often confused by the public:

• Technical Write-off: An internal balance-sheet accounting adjustment where a bank removes an uncollectible non-performing asset from its active branch ledger to optimize provisioning and tax liability, retaining the asset in an off-balance-sheet recovery ledger. A technical write-off does not forgive the debt or discharge the borrower. The bank’s legal rights to sue, enforce SARFAESI, and pursue personal assets continue in full force.
• Compromise Settlement: A bilateral, legally binding contract under Section 63 of the Indian Contract Act. The lender formally agrees to accept a reduced sum in full satisfaction of its claim, waives the remaining ledger balance, releases mortgaged securities, and permanently extinguishes the borrower’s liability.

1. Expecting criminal cases to be quashed upon settlement

Promoters and directors charged with economic offences or bank fraud often assume that paying an approved OTS automatically closes criminal proceedings. In multiple decisions, the Supreme Court has affirmed that economic offences involving public money, falsification of accounts, and criminal conspiracy cannot be quashed merely because the accused arrived at a civil settlement with the bank. A civil compromise does not extinguish criminal culpability under the Bharatiya Nyaya Sanhita or Prevention of Corruption Act.

2. Borrowers applying for fresh loans during the cooling-off period

Entrepreneurs who settle a distressed business loan often establish a new company within 3 months and apply for fresh working capital or vehicle finance. Credit bureau algorithms instantly cross-reference the directors' PAN and DIN records. Because the 12-month cooling-off mandate is universally tracked by Core Banking Solutions, the application is rejected automatically across all commercial banks.

3. Public sector bank "vigilance paralysis"

In public sector banks, senior officers are subject to scrutiny by the Central Vigilance Commission (CVC) and audit under Section 13(1)(d) of the Prevention of Corruption Act, 1988. Bank executives are frequently terrified that approving a substantial haircut on a large loan will be branded by anti-corruption agencies as "undue favour to a private party". Consequently, viable OTS proposals are often delayed or rejected, forcing accounts into protracted, value-destroying SARFAESI auctions.

How to structure an OTS proposal to align with the RBI framework

1. Request the lender's Board-approved OTS policy: Under customer service norms, lenders must make the core framework of their compromise settlement policies transparent. Ask the branch for the broad parameters (e.g., minimum cash down payment, maximum repayment tenure, approved discount bands).
2. Demonstrate superior Net Present Value (NPV): Frame your settlement proposal around the bank’s own regulatory obligations. Show that your upfront cash offer gives the bank a higher return, discounted for time and legal costs, than taking the property through a 3-year DRT battle.
3. Plan for the 12-month cooling-off window: If your business requires continuous debt financing, understand that a compromise settlement will cut off institutional bank credit for at least 12 months. Ensure you have alternative equity, internal cash flows, or private trade credit lined up before signing the compromise agreement.
4. Ensure separate treatment of personal guarantees: Ensure the compromise agreement explicitly provides that the personal and corporate guarantors are discharged simultaneously upon payment of the settlement amount. If the agreement is silent on guarantors, the bank may pocket the compromise payment from the company and pursue the personal guarantor for the balance.

Can the bank refuse to give me an OTS even if I offer the full principal amount?

Yes. If the bank holds mortgaged property whose realisable market value is sufficient to recover the principal plus all accrued interest, the bank’s Credit Committee is legally entitled to reject your proposal. Under Bijnor Urban Cooperative Bank, the bank is not legally obligated to grant a waiver if enforcement of collateral will yield a higher recovery.

Will a compromise settlement erase a criminal cheque-bounce case under Section 138?

Unlike serious offences like fraud or forgery, an offence under Section 138 of the Negotiable Instruments Act is a quasi-criminal private complaint enacted to ensure commercial trust. Under Section 147 of the NI Act, cheque-bounce offences are explicitly compoundable. If the bank agrees as part of the compromise terms, both parties can file a joint application before the Magistrate to compound and dismiss the Section 138 case upon receipt of the settlement amount.

Can a wilful defaulter get a fresh bank loan after completing a compromise settlement?

Under the RBI Master Directions on Wilful Defaulters, any entity or promoter classified as a wilful defaulter is debarred from institutional credit for a period of 5 years from the date the compromise settlement is completed and the wilful defaulter tag is formally removed.

How does the cooling-off period affect personal guarantors?

If a personal guarantor pays or participates in a compromise settlement that results in debt waiver, the guarantor is equally subject to the 12-month cooling-off period. Credit bureaus reflect the settlement against the guarantor's PAN, and regulated lenders cannot grant fresh credit to the guarantor until 12 months have elapsed from the date of final payment.

Does the 12-month cooling-off period apply to private equity or non-regulated loans?

No. The RBI cooling-off rule binds Regulated Entities (REs) of the Reserve Bank (banks, NBFCs, HFCs, AIFIs). It does not legally prohibit un-regulated private lenders, private equity investors, or trade creditors from extending capital, although private investors will see the "Settled" tag on credit bureau reports.

• How One-Time Settlement (OTS) Works
• MSME and Business Loan Settlements
• "Settled" vs "Closed" Credit Report Impact
• No-Dues Certificate and Document Release
• Wilful Defaulter Process and Jah Developers