RBI circular controversy | In a wilful muddle

The central bank’s latest circular on wilful defaulters creates more confusion than clarity, forcing many to ask if it was offering a window of escape to the likes of Vijay Mallya and Nirav Modi

(Illustration by Nilanjan Das)

This was a controversy that the Reserve Bank of India (RBI) could have well done without. On June 8, the country’s central bank issued a circular to commercial banks, according to which wilful defaulters—those who choose not to honour their obligations to banks despite the ability to do so—could get into a compromise settlement with banks and finance companies and seek write-offs from these lenders. Further, the RBI directed banks to fix a minimum cooling period of at least a year before considering fresh exposure to borrowers who had undergone compromise settlements. Though the RBI was at pains later to clarify that this was not a fresh direc­tive, the timing of the new cir­cular and its purpose left the general public unconvinced. The RBI also said that the circular was meant to be a “general prescription” for defaulters, and excluded wilful defaulters and fraudsters, but many feared that the new framework made it easier for wilful defaulters to obtain new loans after a year of executing a compromise settlement.