RBI Loan Settlement Rules in India: How the June 2023 Framework Works
The Reserve Bank of India’s June 2023 framework is an important development in the way banks, NBFCs and other regulated financial institutions handle stressed and distressed loan accounts. The framework provides a formal regulatory structure for compromise settlements and technical write-offs, bringing greater consistency to the process followed by regulated entities when they decide how to deal with loans that may not be fully recoverable. Rather than allowing each institution to handle such cases without a defined governance structure, the RBI framework requires regulated entities to establish appropriate policies and approval mechanisms for compromise settlements and technical write-offs.
The framework was introduced by the Reserve Bank of India on June 8, 2023, through its directions concerning the resolution of stressed assets. It applies to regulated entities covered by the directions, including banks and NBFCs, along with certain other financial institutions. Its purpose is not to provide borrowers with a government-sponsored debt waiver or a fixed loan-discount scheme. Instead, it establishes the regulatory and governance framework within which a regulated lender can negotiate and approve a compromise settlement when it believes that doing so is appropriate for recovering money from a stressed borrower.
Under the RBI framework, a compromise settlement involves a negotiated arrangement between the borrower and the lender. In such an arrangement, the borrower agrees to pay a specified amount, generally in cash, and the lender agrees to accept that amount in full settlement of its claims covered by the settlement, even though the amount accepted may be lower than the total amount otherwise due. The difference represents the lender’s sacrifice under the settlement. This mechanism can provide a practical resolution where recovering the entire outstanding amount is unlikely or would require disproportionate time and expense.
A crucial point for borrowers is that the RBI framework does not prescribe one standard settlement percentage for all loans. There is no general RBI rule stating that a borrower is entitled to settle a loan for 30%, 40%, 50% or any other fixed percentage of the outstanding balance. The settlement amount depends on the lender’s approved policy and the circumstances of the individual account. A borrower may make a settlement proposal, but the lender retains the authority to determine whether it is willing to accept the proposal and on what terms.
The RBI requires regulated entities to maintain board-approved policies governing compromise settlements and technical write-offs. These policies establish the rules and procedures that the institution must follow when considering such cases. They can specify the circumstances in which a compromise settlement may be considered, including conditions relating to the age and status of the account and the deterioration in the value of available collateral. Because each lender has its own board-approved policy, the settlement process and eligibility conditions can differ between banks and NBFCs.
The requirement for a board-approved policy is significant because it means that a settlement decision should not simply depend on an informal promise made by an individual collection agent. The lender is expected to have an established internal framework under which settlement proposals are evaluated and approved. The borrower should therefore seek confirmation that a settlement offer has been properly authorised and should obtain the terms in writing before making a substantial payment.
The RBI framework also requires lenders to establish principles for determining the amount that can be accepted as a settlement and the extent of sacrifice that can be made. Where security or collateral is available, the lender must prudently consider its current realisable value. The methodology for determining that value must be incorporated into the lender’s policy. This means that the amount offered by a borrower cannot necessarily be evaluated simply as a percentage of the original loan amount. The lender can consider the amount it expects to recover from the borrower, the value of collateral and the overall prospects and costs of recovery.
This is particularly important for secured loans. If a loan is backed by property, a vehicle or another form of security, the existence and value of that security can influence the lender’s settlement decision. A borrower should therefore never assume that paying an agreed settlement amount automatically releases collateral unless the settlement documentation clearly provides for its release. The treatment of security should be specifically addressed in the settlement agreement wherever relevant.
The RBI framework also establishes safeguards concerning the authority that can approve a compromise settlement. The authority approving a compromise settlement must be at least one level higher in the hierarchy than the authority that originally had the power to sanction the credit exposure. In addition, a person who participated in the original sanction of the loan cannot participate in approving the compromise settlement for that same account. These requirements are intended to strengthen internal controls and provide greater independence in the settlement decision.
Special approval requirements can apply to certain categories of borrowers and accounts. For example, where compromise settlements involve borrowers classified as frauds or wilful defaulters, the relevant RBI framework contains additional governance requirements, including Board-level approval. This demonstrates that compromise settlements are not treated as a simple administrative exercise. The nature of the borrower and the circumstances surrounding the account can affect the level of scrutiny and approval required.
Another important aspect of the framework concerns the manner in which the settlement amount is paid. Where the agreed settlement amount is to be paid over a period exceeding three months, the arrangement is treated as restructuring under the applicable prudential framework. Consequently, borrowers should carefully examine the payment schedule contained in a settlement proposal. An arrangement described informally as a settlement may have different regulatory implications depending on the period over which the agreed amount is paid.
The RBI framework also introduces reporting and monitoring requirements within regulated entities. Compromise settlements and technical write-offs approved by relevant authorities are subject to internal reporting, and matters approved at senior management or Board-level committee level are required to be reported to the Board. The Board is expected to prescribe suitable reporting formats covering information such as the number and amount of accounts involved, trends in settlements and technical write-offs, the categories of accounts concerned and recoveries from technically written-off accounts. These requirements are intended to ensure that settlement activity remains subject to institutional oversight.
For borrowers, perhaps the most important point is that the RBI framework does not create an automatic right to settlement. A borrower who is unable to repay a loan in full can approach the lender and request a compromise settlement, but the lender is not automatically required to accept the borrower’s proposed amount. The lender evaluates the account according to its internal policy, the borrower’s circumstances, the prospects of recovery and other relevant factors. The final settlement amount therefore depends on negotiation and the lender’s approval process.
This distinction is particularly important because many online advertisements and third-party agents promote loan settlement using claims such as “settle your loan at 40%” or “RBI-approved 50% loan settlement.” Such statements can create the false impression that the RBI has prescribed a standard settlement discount. The RBI framework does not work in this way. The regulator establishes rules governing how regulated lenders conduct compromise settlements, but it does not negotiate individual debts or guarantee a particular reduction for borrowers.
A borrower’s financial circumstances can nevertheless play an important role in a settlement discussion. Genuine financial hardship, such as loss of employment, a significant reduction in income, serious medical expenses or business difficulties, can help explain why full repayment is no longer realistic. The borrower may be asked to provide supporting documents demonstrating the financial difficulty. However, financial hardship does not automatically guarantee settlement. It is one factor that the lender may consider when assessing the overall circumstances of the account.
The lender may also consider how much it is likely to recover if it does not accept the settlement. If continuing recovery proceedings are expected to be expensive, prolonged or uncertain, a negotiated settlement may become commercially attractive to the lender. Conversely, if the borrower has substantial assets or valuable collateral and the lender believes that a larger recovery can be achieved through other means, the lender may have less reason to accept a heavily discounted settlement proposal.
The distinction between compromise settlement and technical write-off is equally important. A technical write-off does not necessarily mean that the borrower’s debt has been forgiven. It is primarily an accounting treatment under which a lender may remove an amount from its books while continuing to pursue recovery from the borrower. A compromise settlement, on the other hand, involves an agreed resolution between the lender and borrower under which the lender accepts the specified settlement amount and sacrifices the portion covered by the settlement. Borrowers should therefore never assume that the words “written off” automatically mean that no further liability exists.
A properly documented settlement is essential for protecting the borrower. Before making the payment, the borrower should obtain a written settlement communication from the lender identifying the relevant loan or credit-card account, the total settlement amount, the payment deadline and the conditions under which the payment will be treated as full and final settlement. After payment, the borrower should obtain appropriate confirmation from the lender and retain the payment records. These documents can become extremely important if a dispute later arises concerning the amount paid or the status of the account.
The borrower should also monitor the credit report after the settlement. A compromise settlement can be reported differently from an account that has been repaid in full. In particular, the account may be reflected as “settled” rather than “closed” where the lender has accepted less than the full contractual amount. This distinction can be significant because future lenders may view a settled account as evidence that the original repayment obligation was not completed in full.
The impact of settlement on future borrowing is therefore an important consideration before agreeing to a reduced payment. Settlement can resolve an immediate debt problem, but it may make future access to credit more difficult. A future lender may take the settlement history into account when assessing a new loan or credit-card application. This does not necessarily mean that the borrower will never receive credit again, but the settlement can remain a negative factor in the lender’s assessment for a considerable period.
The RBI framework also contains a cooling-off requirement following compromise settlements. For non-farm credit exposures, a minimum cooling period of 12 months applies before the regulated entity can assume fresh exposure to the borrower, while the lender’s own board-approved policy may prescribe a longer period. This should not be interpreted as a nationwide ban preventing the borrower from obtaining credit from every lender for 12 months. Rather, it is a regulatory restriction concerning fresh exposure by the regulated entity that undertook the compromise settlement, subject to the applicable framework and the lender’s policy.
The June 2023 framework therefore represents a structured regulatory approach to loan resolution rather than a blanket debt-relief programme. It gives regulated lenders a formal mechanism through which stressed accounts can be resolved while requiring internal policies, appropriate approval authorities, consideration of collateral, reporting and oversight. At the same time, it leaves lenders with discretion to decide whether a particular compromise settlement is commercially and prudentially appropriate.
For borrowers, the practical lesson is that a loan settlement should be approached as a serious financial resolution, not simply as an opportunity to obtain a discount. Before accepting an offer, the borrower should compare settlement with other possibilities such as full repayment, restructuring or an agreed repayment plan. If settlement is ultimately chosen, the borrower should ensure that the arrangement is authorised by the lender, obtain all important terms in writing, make payment through an authorised channel and secure appropriate confirmation after payment.
The RBI’s June 2023 framework has therefore created greater structure around how regulated lenders in India can handle compromise settlements and technical write-offs. It does not guarantee borrowers a particular reduction in their debt, nor does it require every lender to accept a settlement proposal. Instead, it establishes the governance framework within which regulated entities can make these decisions. The lender’s board-approved policy, the circumstances of the individual account, the borrower’s financial position, the value of available security and the lender’s assessment of recovery prospects all play a role in determining whether a settlement is ultimately approved and on what terms.
