The Reserve Bank of India (RBI) decree states that banks must have a loan recovery policy that is bound for compromises and covenant of non-performing assets. But not each borrower is provided with procurement, and whether to end a poor loan account through OTS is on the sole responsibility of the concerned bank based on some principles and is not relevant in case of willful failures.
If a loan account becomes overdue and turns into an NPA, banks must reconcile it as per the RBI guidelines. This prerequisite diversifies as per the residual due (principal and interest) and other circumstances. Under such a plot, banks have to compromise on their profitability by accepting an outlay that can be handled by the borrower on a one-time base.
Effects on Banks,
Bank’s profits from interest are comparatively decreased.
The quality of the balance sheet is hit.
Immediate and speedy return of loans and credits
Progress in liquidity
The smooth course of reserves that fosters a perpetual lending process
The strength of the economy is sustained.
Compromise contract attributes to a negotiated settlement where the borrower offers to pay, and the Bank agrees to receive incomplete one-time payment settlement of its dues with an outlay less than the full amount that must be paid to the Bank under the loan contract. This settlement habitually includes a specific reduction by the Bank by way of write off and/or relinquishment of a portion of its dues on a one-time base. The Policy acknowledges that it is not likely to lay down specific guidelines that can be obeyed consistently in case of all compromise offers as each offer is unique in the circumstances requiring its deliberation as a restoration choice.