The Reserve Bank of India (RBI) plays a critical role in maintaining the financial stability of the Indian economy. Among its various functions, overseeing settlement systems is one of the most significant. These systems range from resolving non-performing loans to regulating digital payments and interbank fund transfers. This article provides a comprehensive overview of key RBI settlement-related frameworks, organized under major categories.
Loan Resolution Mechanisms: One-Time and Compromise Settlements
One of the central concerns in banking is the resolution of Non-Performing Assets (NPAs). RBI permits banks to resolve such loans through mechanisms like One-Time Settlements (OTS) and Compromise Settlements.
A One-Time Settlement (OTS) is an agreement where a borrower pays a reduced, negotiated sum to settle a defaulted loan in full. RBI requires all banks to maintain a board-approved OTS policy. This policy must define eligibility, typically covering NPAs in small and medium enterprises (SMEs), retail loan accounts, and agricultural loans. Banks must ensure that borrowers in similar conditions are treated equally, that settlement terms are well-documented, and that recovery occurs within a specified timeframe. The borrower does not have a legal right to demand OTS—it remains a commercial decision of the bank.
KEY GUIDELINES
Board-approved policies: Each bank must have a board-approved OTS policy.
Eligibility: Generally applicable to non-performing assets (NPAs), particularly small and medium-sized accounts.
No discrimination: All borrowers in similar circumstances should be treated uniformly.
Documentation: Proper documentation of terms and borrower acceptance is mandatory.
Reporting: Settlements must be reported in the bank’s records, with write-offs shown transparently.
In June 2023, the RBI issued new guidelines that expanded the scope of Compromise Settlements. These settlements are now permitted even for accounts classified as wilful defaulters, fraud accounts, or large corporate borrowers. Under the updated framework, banks must formulate board-approved compromise policies outlining the decision-making process, including evaluation of the borrower’s offer and associated risk. A minimum cooling-off period, usually 12 months, is required before a bank can extend new credit to a borrower who has settled under compromise terms. Provisioning and classification must follow existing prudential norms until the entire settlement amount is received. These guidelines aim to maximize recovery and bring resolution to otherwise unyielding cases.
Digital Payments and Settlement Systems
RBI also regulates the broader payments ecosystem through the Payment and Settlement Systems Act, 2007. This Act governs all electronic payment systems, including UPI, IMPS, AEPS, and Bharat Bill Pay. RBI’s regulations ensure that settlements are secure, efficient, and real-time where necessary. Payment systems like UPI and IMPS operate under the oversight of institutions such as the National Payments Corporation of India (NPCI). RBI mandates 24×7 operations, implementation of fraud monitoring using artificial intelligence, and interoperability across platforms. Additionally, digital dispute resolution is governed under the RBI’s Ombudsman Scheme, ensuring timely redressed for consumers.
In interbank transactions, the Real-Time Gross Settlement (RTGS) and the National Electronic Funds Transfer (NEFT) systems are the primary platforms. RTGS is intended for high-value transactions and ensures immediate and final settlement. It operates continuously throughout the day, every day of the year. NEFT, on the other hand, is more suitable for retail and small business use, settling funds in half-hourly batches. RBI has ensured that both systems operate efficiently with minimal failure and complete audit trails.
Legal Framework and System Governance
The Payment and Settlement Systems Act, 2007 empowers RBI to regulate and supervise all payment system operators. It ensures licensing, sets technical and operational standards, and mandates compliance with consumer protection norms. This legislation covers not just digital payments but also securities and forex settlements facilitated by institutions such as the Clearing Corporation of India Limited (CCIL).
Emerging Trends and Strategic Directions
The Indian financial system is rapidly evolving with technological advancement. RBI has facilitated cross-border interoperability for UPI with countries like Singapore and the UAE. It is also overseeing the pilot launch and phased adoption of the Digital Rupee, India’s central bank digital currency (CBDC), in both retail and wholesale forms. In support of financial inclusion, merchant discount rates (MDR) have been waived for certain categories of UPI payments. Additionally, advanced analytics and AI-driven risk assessment tools are being integrated into payment systems to strengthen operational resilience.
