RBI or Reserve Bank of India, which is the central regulating authority for all banks and financial institutions in India has issued a special scheme for settlement of NPA in the MSME sector. This is a non-discretionary One-Time Settlement Scheme for the recovery of NPAs under MSE Sector as a part of the Recovery Policy. It is an important step to control NPA in India.
As per the guidelines about compromise settlements, negotiated settlements where a borrower offers to pay, and the bank agrees to accept in full and final settlement of its dues an amount less than the total amount due to the bank under the particular loan contract.
The bank has to waive off or write off some amount of the loan. It will be called the sacrifice by the bank, which will be done on a one-time basis.
It is not possible to lay down precise guidelines that can be uniformly followed for all NPA contracts. It is because each account is unique as far as the circumstances necessitating its consideration as a recovery option is concerned. However, a broad framework can be decided.
The guidelines for the special settlement of NPA in the MSME sector will help in controlling NPA in India.
Time of Compromise
The opportunity cost of funds is an important aspect when we look into the NPA settlement. It is the fund that could come in handy at a later period. It should be calculated to establish the comparative benefit of “today” or “later”. When the value is assessed on the basis of NPV or Net Present Value, it will give a pragmatic dimension to the approach while recovering a Non-performing Asset.
The guidelines issued by the RBI are indicative and objective. They should be considered as a framework as mentioned above. The decision should be taken based on the intelligence and decision-making ability and expertise of the officials. Also, the decision should protect the interests of the bank.
Guidelines
The issuing bank should ensure compliance with the following guidelines
- The hierarchy level of the sanctioning committee may be the same as approval authority.
- The sanctioning authority exercised the powers judiciously and adhered to all guidelines issued by the bank.
- There was no laxity in the conduct and the supervision of the advances after disbursement to the borrower. It is a very important aspect. If it is followed well, then the possibility of NPA will come down.
- The staff that handled the process of sanctioning the loan acted transparently. There was not an act of omission or commission on their part. If any debt proves irrecoverable because of such reason, then it should be considered seriously.
- It should be ensured that all possible expedient steps to recover the dues are taken. The settlement has to be in the larger interest of the bank. And there are no further prospects of recovering the debt.
- It is possible that the bank enters a compromise settlement with all willful defaulters or fraudulent borrowers without prejudice to the criminal case filed against the borrower. Such cases of compromise settlement must be vetted by an appropriate approval authority as mentioned by the bank.
- When banks prepare the compromise settlement in NPA accounts for the MSME, it will ensure that the Net Present Value of the settlement amount should be more than the net present value of the realizable value of securities.
The special settlement process for the MSME sector is for the larger interest of industries in India. It is a step taken to control the growth of NPA. It is for the betterment of the overall economy.