Mumbai: The Bombay high court has held that under the Reserve Bank of India (RBI) circular, when a compromise settlement is entered with the lending bank and a non-performing account is settled, there is “no justification in continuing with the penalty measures further for a period of five years, unless it is established that the defaulter is guilty of fraud or that he has siphoned off funds”. The HC offered relief to two directors of a mineral trading company, lifting restrictions imposed on them for availing new loans from banks and financial institutions, by directing the removal of their names from a list of wilful defaulters.The degree of a default would vary in every case, the HC said, and held that it would be “unreasonable to treat every such default on par, as once the defaulter paid the compromise amount, his name is allowed to be deleted from the list of wilful defaulters,” Justices Bharati Dangre and R N Laddha observed in a judgment made available on Friday. The HC disposed of, on March 25, a petition filed by Ravi and Nakul Arya, directors of International Mineral Trading Pvt Ltd, who had approached the HC and sought a declaration that continued penal measures under the RBI master circular on wilful defaulters of July 2015, which places a bar on defaulters for five years, are not applicable when there is a successful compromise settlement and consequent withdrawal of the wilful defaulter tag by the lender bank. IMTC had taken a loan of Rs 115 crore in 2008 from Bank of Baroda and an additional Rs 90 crore from Union Bank. In July 2017, the company’s place was confirmed by a review committee of Union Bank on the list of wilful defaulters. But the company in its petition before the HC pointed out that it had reached a successful settlement, based on which Bank of Baroda had dropped it from such a list; hence, it can’t be banned from seeking further loans, argued Arya’s senior counsel Vikram Nankani. The HC agreed with Nankani’s plea of carving a distinction between those who close an NPA via a compromise payment and those who continue with the default. The HC, after also hearing advocates Prasad Shenoy with Parag Sharma for RBI, AR Bamne for Bank of Baroda and Priyam Amin for Union Bank of India, noted that the RBI’s master circular on wilful defaulters is intended to “put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institution so as to insure that further bank finance is not made available to them”.The HC also noted a new 2024 circular by RBI pertinently “diluted the bar imposed” on new additional credit facility to one year after a name is scratched off the wilful defaulters list but maintained a five-year bar for those seeking loans to float new ventures. The RBI in 2024 also introduced a ‘compromise settlement’ clause to enable the bank to remove a borrower’s wilful defaulter tag on payment of such compromise amount. “In the recent circulars of 2024 and 2025, we have found distinction being made, as regards the bar on additional credit facility and fresh credit facility for floating new ventures, the former being not allowed for a period of one year and the latter for a period of five years. However, if for unavoidable circumstances, the borrower is unable to repay the loan, in our opinion, the axe should not fall upon him, debarring him for five years,” the HC held. Ruling in favour of the Aryas, the HC said, “We declare that as far as the case of the petitioner is concerned, in the wake of the compromise entered by International Mineral Trading Private Limited with the Bank, the restriction imposed for availing additional facility from any Bank/FI shall not be invoked against the petitioners in the peculiar circumstances.”
