Even a Wilful Defaulter Can Settle: RBI's 2023 Compromise Framework and the 12-Month Cooling Period

For two decades the working assumption in Indian stressed-asset recovery was simple: once a borrower's name reached a wilful defaulter list, the negotiating table closed. The Reserve Bank of India ended that assumption on 8 June 2023, when it issued the Framework for Compromise Settlements and Technical Write-offs, circular RBI/2023-24/40 (DOR.STR.REC.20/21.04.048/2023-24). Paragraph 13 says, in terms, that regulated entities 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.

That single paragraph reopened a negotiated exit for the hardest category of stressed borrower. It did not hand anyone an amnesty: the same framework imposes a cooling period with a floor of 12 months before the lender may take fresh exposure, routes every fraud and wilful-default proposal to the Board under paragraph 6(ii), and leaves any criminal case running in parallel. Read paragraph 13 as forgiveness and you will be badly wrong; read it as a procedural door and you will be right.

The Statutory Position

The framework is a direction issued under the Reserve Bank's supervisory powers, not a statute, and it binds the entities named in its applicability clause: commercial banks including small finance banks, local area banks and regional rural banks; primary (urban), state and central co-operative banks; all-India financial institutions; and non-banking financial companies. Any borrower dealing with one of these is dealing with an institution that must, under paragraphs 1 to 4, hold a Board-approved compromise policy covering permissible sacrifice and the methodology for valuing realisable security.

The definitions sit in paragraph 1 of the Annex. A compromise settlement is "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". A technical write-off means "cases where the 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". That distinction matters more to a borrower than to an accountant: a technical write-off extinguishes nothing.

The cooling period sits in paragraph 11. For non-farm exposures the floor is 12 months before the regulated entity takes fresh exposure after a settlement or technical write-off, and lenders may fix longer periods in their own Board policies. For agricultural credit the period is left entirely to each entity's Board-approved policy, with agricultural activities defined by the RBI Master Circular on prudential norms. The floor is a minimum, not a promise of re-entry at month 13.

A second instrument layers on top. The Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, numbered RBI/DoR/2024-25/122 and dated 30 July 2024, define a wilful defaulter at paragraph 3(1)(u) as a borrower or guarantor who has committed wilful default where the outstanding is Rs 25 lakh and above. Paragraph 4(2)(a) requires the lender to examine the wilful-default aspect in every NPA account of Rs 25 lakh and above within six months of NPA classification. Paragraph 11(1) removes a name from the List of Wilful Defaulters only when the borrower has fully paid the compromise amount, and paragraph 11(2) keeps it there on part payment even if the outstanding falls below Rs 25 lakh.

The two instruments run separate clocks, which is the most misunderstood point in this area. The 12-month floor runs from the settlement or write-off. Paragraph 5(3)(a) of the 2024 Directions separately bars any lender from granting an additional credit facility to a wilful defaulter for one year after the name is removed from the list, and removal itself happens only on full payment. For a borrower paying in instalments, those clocks do not start together.

Neither instrument touches the enforcement statutes. A lender that has issued a demand notice under Section 13(2) of the SARFAESI Act, 2002 keeps its 60-day clock and its power under Section 13(4) to take possession, sell or lease the secured asset without the intervention of a court. Negotiations do not suspend SARFAESI measures unless the lender agrees in writing that they do.

Procedure Step by Step

1. Confirm the classification dates. Paragraph 4(2)(a) of the 2024 Directions requires examination of wilful default in every NPA account of Rs 25 lakh and above within six months of NPA classification. Ask in writing for the NPA date, the outstanding on that date, and whether the file went to the Identification Committee.

1. Check the show-cause trail. Paragraph 4(1)(a)(ii) requires a show-cause notice with submissions called within 21 days and disclosure of all materials relied on. Paragraph 4(1)(a)(v) allows a written representation to the Review Committee within 15 days, and paragraph 4(1)(a)(vii) requires an opportunity of personal hearing.

1. Ask for the Board-approved compromise policy. Paragraphs 1 to 4 of the 8 June 2023 framework require one to exist, covering permissible sacrifice and security-valuation methodology. A proposal built on the lender's own stated method is harder to refuse than a round-figure offer.

1. Anchor the number to realisable security value. Run the arithmetic on what an early exit costs using the foreclosure calculator, and where several facilities are involved, the debt consolidation calculator.

1. Structure payment inside three months if you can. Paragraph 7 treats anything longer as restructuring, a cost the lender may decline to absorb. A 90-day structure removes that objection.

1. Expect the file to reach the Board. Paragraph 6(ii) makes Board approval mandatory in fraud and wilful-defaulter cases, and paragraphs 5 and 6 bar the original sanctioning officials from approving it. No branch-level officer can bind the lender to a settlement of this kind.

1. Get one written sanction letter. It should record the settlement amount, the payment dates, the treatment of the wilful-default tag under paragraph 11(1), and what the lender will report to credit information companies.

1. Pay in full, then chase the list entry and diarise both clocks. Removal follows full payment under paragraph 11(1); part payment keeps the name listed under paragraph 11(2). Then count 12 months minimum under paragraph 11 of the framework and one year from removal under paragraph 5(3)(a). Track the effect on your credit score only after the final instalment clears.

Borrower Defences Available

The defences fall into three groups: procedural challenges to the classification, statutory remedies against enforcement, and regulatory escalation when a lender ignores its own Board policy.

On classification, each right in the 2024 Directions is a ground of challenge if it was skipped. The 21-day show-cause window under paragraph 4(1)(a)(ii) carries an express obligation to disclose all materials relied on, so a notice that withholds the underlying documents is vulnerable. The 15-day representation under paragraph 4(1)(a)(v) and the personal hearing under paragraph 4(1)(a)(vii) are separate rights, and the Review Committee under paragraph 3(1)(r) is a body distinct from the Identification Committee under paragraph 3(1)(j).

On enforcement, the timelines are unforgiving. A borrower served under Section 13(2) may make a representation under Section 13(3A), and the secured creditor must reply with reasons within 15 days. Once measures are taken under Section 13(4), an application to the Debts Recovery Tribunal under Section 17 must be filed within 45 days. An appeal from that order lies under Section 18 within 30 days and is not entertained unless the borrower deposits 50 per cent of the debt due, reducible by the Tribunal to not less than 25 per cent for reasons recorded in writing. Under the Recovery of Debts and Bankruptcy Act, 1993, the parallel pre-deposit in Section 21 is 75 per cent of the debt due as determined by the Tribunal, waivable or reducible for recorded reasons.

The insolvency consequence explains why many promoters pursue settlement at all. Section 29A of the Insolvency and Bankruptcy Code, 2016, inserted by the 2018 amendment, bars wilful defaulters and NPA accounts from submitting a resolution plan. A settlement that leads to removal from the list under paragraph 11(1) of the 2024 Directions changes a promoter's position in a way that litigating the tag alone cannot.

Regulatory escalation is the third route and the least used. If a lender refuses to disclose or apply its Board-approved compromise policy, or resiles from a sanctioned settlement, the complaint goes first to the lender's own grievance redressal officer and then to the RBI Ombudsman through the complaint management system at cms.rbi.org.in. The Reserve Bank's borrower information portal at sachet.rbi.org.in carries registration and grievance details for regulated entities. For deficiency of service, the National Consumer Helpline on 1915 and the e-Daakhil portal are the consumer-forum route. If recovery contact becomes threatening or involves impersonation, report it on cybercrime.gov.in or the helpline 1930.

Recent Tribunal/HC Position

The clearest judicial illustration of how a settlement interacts with a wilful-default tag is Konarkagro Polytech Pvt. Ltd. and 4 Others v. Bank of Baroda and 2 Others, WRIT-C No. 35965 of 2022, decided on 17 January 2023 by a Division Bench of the Allahabad High Court, Manoj Kumar Gupta and Vikram D. Chauhan, JJ.

The facts track the problem exactly. The petitioner company and its directors were declared wilful defaulters by Bank of Baroda in July and October 2021. The petitioners then submitted a compromise proposal, which the bank accepted on 14 June 2022: Rs 5.75 crore in full settlement against dues of Rs 7.13 crore, a sacrifice of Rs 1.38 crore, or roughly 19.4 per cent. The petitioners claimed full compliance with the settlement terms and asked the Court to set aside the wilful-defaulter declaration.

The Court did not quash the declaration. It disposed of the petition with liberty to the petitioners to represent before the bank for review of the classification, directing that "the representation that may be filed by the petitioners will be decided by the respondent Bank/competent authority within a period of four weeks from the date of its submission. In case the decision of the Bank goes against the petitioners, they will be at liberty to avail legal remedies as may be available to them."

Three points follow. Settlement and de-tagging are separate steps: the 17 January 2023 order treats the compromise as the trigger for a review, not as automatic erasure. The four-week direction shows a court willing to put a clock on the lender's decision rather than take that decision itself. And the sequence ran from declaration in July and October 2021 to acceptance on 14 June 2022 to the order of 17 January 2023 — about 18 months, a realistic planning horizon. The full text is on Indian Kanoon.

Read alongside paragraph 11(1) of the 30 July 2024 Directions, which now conditions removal from the List of Wilful Defaulters on full payment of the compromise amount, that sequence is precisely the process the regulator has since codified: settle, pay in full, then apply for removal.

FAQ

Can a bank legally settle with a borrower it has declared a wilful defaulter?

Yes. Paragraph 13 of circular RBI/2023-24/40 dated 8 June 2023 permits regulated entities to undertake compromise settlements or technical write-offs in accounts categorised as wilful defaulter or fraud, without prejudice to the criminal proceeding underway against such debtors. Paragraph 6(ii) requires Board approval in every such case.

Does a settlement stop a criminal case?

No. Paragraph 13 of the 8 June 2023 circular preserves the criminal proceeding expressly, in the words "without prejudice to the criminal proceeding underway against such debtors". A settlement resolves the lender's money claim, not a prosecution.

How long is the cooling period before the lender can lend again?

Paragraph 11 of the 8 June 2023 framework sets a floor of 12 months before fresh exposure after a settlement or technical write-off, and lenders may fix longer periods in their Board policies; for agricultural credit the period is set entirely by the entity's Board policy. Separately, paragraph 5(3)(a) of the 2024 Directions bars additional credit to a wilful defaulter for one year after the name leaves the List of Wilful Defaulters.

When does my name come off the wilful defaulter list?

Paragraph 11(1) of the Directions dated 30 July 2024 removes it only when the compromise amount has been paid in full. Paragraph 11(2) provides that on part payment the name stays listed even if the outstanding falls below the Rs 25 lakh threshold in paragraph 3(1)(u).

Is a technical write-off the same as a waiver of my dues?

No. Paragraph 1 of the Annex to the 8 June 2023 circular defines it as a write-off "only for accounting purposes, without involving any waiver of claims", and paragraph 8 keeps provisioning on the original gross exposure where the write-off is partial. The lender can still pursue the full amount.

Why does the bank resist paying the settlement in instalments?

Paragraph 7 of the 8 June 2023 framework treats a settlement payable over more than three months as restructuring under the existing prudential framework, which changes the lender's asset-classification position. A structure completing inside 90 days is usually easier to get sanctioned.

Where do I complain if the lender resiles from a sanctioned settlement?

Start with the lender's own grievance redressal officer, then escalate to the RBI Ombudsman through cms.rbi.org.in; sachet.rbi.org.in carries registration and grievance details for regulated entities. For deficiency of service, the National Consumer Helpline on 1915 and the e-Daakhil portal are available. If recovery contact becomes threatening or involves impersonation, report it on cybercrime.gov.in or the helpline 1930.

Primary sources: Framework for Compromise Settlements and Technical Write-offs, RBI/2023-24/40, 8 June 2023; Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, RBI/DoR/2024-25/122, 30 July 2024; Konarkagro Polytech Pvt. Ltd. v. Bank of Baroda, Allahabad High Court, 17 January 2023.

This explainer is general information on published RBI directions and a reported judgment, not advice on any individual account. Verify every figure against your own sanction and settlement documents.