RBI Compromise Settlement: Prudential Norms 2024 and the 12-Month Cooling Period

The Reserve Bank of India's Framework for Compromise Settlements and Technical Write-offs, issued through circular RBI/2023-24/40 on 8 June 2023 and clarified by the FAQ note of 20 June 2023, has fundamentally rewritten how lenders approach defaulters who want to clear their books. The most contested change is the formal opening of the compromise window to borrowers tagged as willful defaulters or fraud, subject to a 12-month cooling period and board-level approval. For borrowers receiving a Section 13(2) SARFAESI notice in 2026, this Framework changes the negotiating posture of the lender and the discount that may be on offer.

This playbook sets out the statutory position under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), the procedure under the June 2023 Framework, defences a borrower may invoke during recovery, and the recent tribunal position. Every numeric claim is sourced from the RBI circular, the parent statute on indiacode.nic.in, or the cited judgement.

The Statutory Position

The Framework rides on three statutes that together govern bank recovery in India.

First, SARFAESI 2002 empowers a secured creditor holding a security interest of Rs 1 lakh or more (notified threshold) to enforce the security without court intervention. Section 13(2) requires the creditor to issue a 60-day notice once the account is classified as a non-performing asset. The borrower may submit a representation under Section 13(3A); the creditor must reply with reasons within 15 days. If the dues remain unpaid, the creditor may take measures under Section 13(4) including possession, management, or sale of the secured asset.

Second, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB) sets up the Debts Recovery Tribunal (DRT) and the Debts Recovery Appellate Tribunal (DRAT). The DRT also hears Section 17 SARFAESI applications by an aggrieved borrower.

Third, the Insolvency and Bankruptcy Code, 2016 (IBC) gives a financial creditor the right to file under Section 7 once the default crosses Rs 1 crore. The threshold was raised from Rs 1 lakh by the Ministry of Corporate Affairs notification S.O. 1205(E) dated 24 March 2020.

Layered on top of these statutes is the RBI Framework for Compromise Settlements and Technical Write-offs dated 8 June 2023. The Framework explicitly permits compromise settlement with borrowers classified as fraud or willful defaulter, but adds three new safeguards that did not exist under the earlier 2019 prudential framework on resolution of stressed assets.

The 12-month cooling period applies to fresh credit exposure to the same borrower group after the settlement is sanctioned. The Framework does not bar future exposure outright; it bars it for one year from sanction date, after which the lender may consider a fresh proposal on its own credit appraisal.

The Framework also distinguishes between compromise settlement and technical write-off. A technical write-off is purely a balance-sheet entry; the borrower's liability and the lender's recovery rights remain intact. A compromise settlement, by contrast, extinguishes a part of the legal claim on payment of the agreed sum, and the unrecovered portion is permanently waived.

Procedure Step by Step

A borrower seeking a compromise settlement under the June 2023 Framework should expect the following sequence.

1. NPA classification and Section 13(2) notice. The account is downgraded to non-performing asset under the RBI Master Direction on Income Recognition, Asset Classification and Provisioning (IRACP) once interest or principal remains overdue for 90 days. The secured creditor then issues a 60-day demand notice under Section 13(2) SARFAESI specifying the amount due and the secured asset.
2. Representation under Section 13(3A). The borrower has the right to make a written representation; the creditor must reply with reasons within 15 days. This is the first formal opportunity to flag procedural irregularities, dispute the demand, or propose a compromise figure.
3. Settlement proposal. The borrower files a written proposal indicating the lump sum or staggered payment, the source of funds, and any third-party guarantees. The proposal should ideally precede the Section 13(4) measures because once possession is taken the negotiating leverage shifts to the lender.
4. Internal evaluation by the lender. Under the June 2023 Framework, the proposal is placed before the board-approved policy committee. The committee evaluates the realisable value of the security, the cost of further recovery, the time value of money, and the probability of resolution through DRT or IBC.
5. Board-level sanction. Where the borrower is classified as willful defaulter or fraud, sanction must come from the board itself or a committee chaired by an independent director. The sanction note must record the rationale and the haircut percentage.
6. Settlement agreement and payment. A bipartite settlement deed is executed. Payment is typically structured as a 25 per cent up-front instalment with the balance over 6 to 18 months, though the Framework leaves the timeline to the lender's policy.
7. No-dues certificate and CIBIL update. On full payment the lender issues a no-dues letter and reports the closure to credit information companies. As covered in our CIBIL defaulter removal piece, the bureau must update the record within 30 days under the RBI Master Circular on Credit Information Reporting.
8. 12-month cooling period. The borrower group is ineligible for fresh credit from the same lender for 12 months from the sanction date.

A borrower who lets the 60-day clock run without engaging usually finds the compromise haircut shrinks materially once the lender has incurred enforcement cost on valuation, public notice, and physical possession.

Borrower Defences Available

A compromise application does not bar simultaneous statutory defences. The Framework is silent on procedural rights; SARFAESI, RDDB, and the IBC continue to govern.

Section 17 SARFAESI appeal. Once the creditor takes any measure under Section 13(4), typically the possession notice, the borrower has 45 days to apply to the DRT under Section 17. The deposit of the disputed amount is not mandatory at the threshold, though the tribunal may direct a deposit as a condition for stay. Grounds commonly raised include defective service of the Section 13(2) notice, NPA classification not in conformity with IRACP norms, undervaluation of the secured asset, and reserve price below the registered valuation report.

Section 13(3A) representation. Even without going to DRT, the borrower can derail the lender's recovery if the lender fails to reply to the representation with reasons within 15 days. The Supreme Court has read this requirement as mandatory; non-compliance vitiates the subsequent Section 13(4) measures and entitles the borrower to a fresh notice cycle.

Willful defaulter classification challenge. The willful defaulter tag invites the cooling period and harsher CIBIL reporting. Under the RBI Master Circular on Willful Defaulters dated 1 July 2015 and successive amendments, classification requires a two-stage process: an Identification Committee headed by an executive director, followed by a Review Committee headed by the chairman or managing director. The borrower must be given a written representation right at both stages.

IBC Section 7 threshold. A financial creditor cannot drag a borrower into corporate insolvency for a default under Rs 1 crore. The 24 March 2020 notification from the Ministry of Corporate Affairs raised this threshold from Rs 1 lakh, sharply narrowing the use of IBC as a recovery tool against small businesses. A Section 7 application below the threshold is liable to be dismissed at admission stage.

Limitation defence. Article 137 of the Limitation Act, 1963 provides a three-year period for applications to a tribunal where no specific period is prescribed. The Supreme Court has applied this to SARFAESI and IBC alike. A debt that is barred by limitation cannot ground a Section 7 admission, even if the entry continues to sit on the lender's books.

For non-resident borrowers, the repatriation profile of any settlement amount also matters. Our NRI repatriation calculator flags the USD 1 million annual cap for current-account remittance from NRO funds, and our NRI tax calculator helps model the tax outflow on any waiver income that may arise from a settlement.

A separate procedural point: where the borrower entity is a company that has lent or borrowed within a related-party chain, Sections 185 and 186 of the Companies Act 2013 impose their own approval cascade. We have covered the interaction in our Companies Act Section 185-186 piece; the takeaway for compromise settlement is that any inter-corporate loan figuring in the settlement must trace back to a valid Section 186 board resolution.

Recent Tribunal/HC Position

The June 2023 Framework triggered a wave of borrower applications across DRTs and high courts. Three threads have emerged from the post-Framework jurisprudence.

First, on the willful defaulter classification, the Supreme Court in State Bank of India v Jah Developers Pvt Ltd, decided 14 May 2019, held that the RBI Master Circular on Willful Defaulters of 1 July 2015 contemplates a two-tier process and that the borrower has a right to be heard through an authorised representative. Several DRTs have since applied this principle to set aside classifications made without service of the show-cause notice. The Framework's 12-month cooling period kicks in only on a valid classification; a vacated tag means the borrower returns to the standard compromise track without the special board route.

Second, on Section 13(3A) representation, the Supreme Court in ITC Limited v Blue Coast Hotels Limited, decided 19 March 2018, held that the lender's obligation to reply to a Section 13(3A) representation with reasons is mandatory and that breach vitiates the Section 13(4) action. DRTs continue to set aside possession notices where the lender's reply is mechanical, absent, or filed beyond the 15-day window.

Third, on the IBC threshold, the National Company Law Appellate Tribunal has consistently dismissed Section 7 petitions where the principal default is below Rs 1 crore, applying the 24 March 2020 notification prospectively to applications filed after the notification date. This has practically closed the IBC route for the majority of MSME-scale defaults, leaving SARFAESI and the RBI Compromise Framework as the realistic recovery toolkit.

Subodh Bajpai, an enrolled advocate of the Bar Council of Uttar Pradesh and a recovery-side practitioner who appears regularly before DRT Lucknow and the Allahabad High Court, observes that the June 2023 Framework has shifted the practical leverage in favour of the borrower who can demonstrate a credible third-party funder. The board-approval requirement creates an internal pause that earlier branch-level settlements lacked, and during that pause the borrower's negotiating position improves if the proposal is documented and the security is realisable.

The full text of the cited decisions and the underlying RBI circulars can be cross-checked on indiankanoon.org and rbi.org.in. The parent SARFAESI Act 2002 sits on indiacode.nic.in.

FAQ

Can a borrower tagged as willful defaulter still negotiate a compromise under the June 2023 RBI Framework?

Yes. The June 2023 Framework explicitly permits compromise settlement with borrowers classified as willful defaulter or fraud, subject to two safeguards: sanction by the board or a committee chaired by an independent director, and a 12-month cooling period before fresh credit exposure from the same lender. The Framework reverses the pre-2023 practice of treating willful defaulter accounts as a no-go zone for compromise.

What is the 60-day notice under Section 13(2) of SARFAESI?

Section 13(2) of the SARFAESI Act 2002 requires a secured creditor, on classification of the account as a non-performing asset, to issue a written notice to the borrower demanding payment within 60 days. If the borrower fails to pay, the creditor may proceed under Section 13(4) to take possession or sell the secured asset. The borrower may submit a representation under Section 13(3A); the creditor must reply with reasons within 15 days.

What is the time limit for filing a Section 17 SARFAESI appeal?

Section 17 of SARFAESI prescribes 45 days from the date on which the secured creditor takes any measure under Section 13(4). The deposit of the disputed amount is not mandatory at the threshold, though the Debts Recovery Tribunal may impose a deposit condition while granting interim stay. The application is filed before the DRT having jurisdiction over the secured asset.

What is the IBC default threshold for a financial creditor in 2026?

The default threshold under Section 7 of the Insolvency and Bankruptcy Code 2016 is Rs 1 crore. The threshold was raised from Rs 1 lakh by the Ministry of Corporate Affairs notification dated 24 March 2020. A petition below this threshold is liable to be dismissed at admission. The threshold is computed on the principal default; interest and penal charges are added only after admission.

Does a compromise settlement clear the borrower's CIBIL record automatically?

No. On full payment under the compromise, the lender must issue a no-dues letter and report the closure to credit information companies. The bureau is required to update the record within 30 days under the RBI Master Circular on Credit Information Reporting. The closure typically reflects as "settled" rather than "closed" on the bureau report, which lenders may treat as a negative marker for two to three years.

What is the 12-month cooling period under the June 2023 Framework?

The borrower group is ineligible for fresh credit exposure from the same lender for 12 months from the date of sanction of the compromise settlement. The Framework does not bar future exposure outright; after the cooling period, the lender may consider a fresh proposal on the merits of a fresh credit appraisal and the borrower's repaired credit profile.

Can a sanctioned RBI compromise settlement be challenged later?

A compromise settlement once sanctioned and acted upon is contractually binding. Challenge is limited to grounds of fraud, coercion, or material misrepresentation, and must usually be brought before a civil court since the DRT does not exercise contractual jurisdiction. Procedural challenges to the underlying SARFAESI action become academic once the borrower accepts the settlement and tenders payment in full.