By

Rajesh Goyal   

On 12th February, 2013, a small news appeared in ET under the heading "Banks May Ease Recompense Clause for Cos",  (Click on the headline to read the full news).  It was was an innocuous type of news that most of the bankers must have either missed it or ignored the same as not being of much consequence.  A large number of the bankers may not be even aware about "recompense clause".

However, as I read the news item,  I smelled something fishy.  With my limited knowledge of credit and restructuring, I could still feel that corporate and bankers have started lobbying for a new scheme which will cheat the banks as it can lead to large scale sacrifice of revenue.   It can be even worse than what bankers sacrifice while settling NPA accounts, because here the corporate will be still running a profitable business and corporate will be allowed waiving of interest which he has agreed to pay to bring his business out of woods.

Let us first see what does the news item means.   It says that top bankers are considering to the recompense clause for companies that become profitable after debt restructuring,   Most of the bankers are aware that on number of occasions, corporate approach for restructuring of their loans merely to take benefit in the shape of lower interest rates under such a scheme.   However to avoid misuse of this facility of concessions for restructuring, banks over a period of time have learnt their lessons and ask for "recompense clause" when the company becomes profitable and restructuring period is over.

On searching from the net I came across an article under the following heading (link given below) on RBI website which is dated 13th September, 2012, which is actually a keynote address by ED of RBI :-

Highlights and Rationale of the Recommendations of the Working Group to Review the Existing Prudential Guidelines on Restructuring of Advances

The article inter alia on "RECOMPENSE CLAUSE" says the following :

Inspite of the above recommendations, corporate have started lobbying to ease recompense clauses.   Bankers are falling into trap to show reduction of NPA in their balance sheets.  This is how most of the time scams start.  In most of such cases, a lobby starts for concessions and certain positive impact of such concessions are blown out of proportions.  The gullible public, who does not understand the intricacies and impact of such changes, feels that it is being done for good reasons.   Slowly, money changes hands at certain levels and clearances are obtained showing the positive impact.   In this, bankers will be lobbying for corporate in the guise that they will be able to bring NPA at an early date and thus it will make their Balance Sheets cleaner at a much earlier period.  Once such changes come into effect, the top bosses in banks will allow the corporate to ease or waive the recompense amount for payments received underhand.  Those corporate, who will not offer anything, will be denied and will continue to be asked to pay recompense amount.   This is how corruption will seep under this scheme.

Now question arises why bankers instead of easying the recompense clause, asks for recovery of such recompense amount in installments the moment the restructured entity becomes profitable.   I think the stand of RBI is correct that "right of recompense" clause be made mandatory not only for CDR cases but also for non-CDR cases.

Although I had limited exposure of credit, but I have seen as to how corporate use all kinds of tactics to get their interest rates reduced and once it happens under restructuring, do not wish to revert back to original level of interest rates.    There are huge number of bankers who read our articles, and who have much more experience in credit and restructured accounts, I would like them to revisit this issue and write their issues in the Discussion forum at the end of this article or send us some articles so that TRUTH comes out and this move of corrupt bankers and corporates can be buried at the initial stage itself.