Confirming the development, a senior RBI official told The Financial Express that a panel has been set up by the department of banking supervision to examine and suggest criteria for principal write-off, final write-off as also compromise settlements. Senior officials from public sector banks have joined the panel.

Banking analysts have interpreted the move as a "significant" one as the recommendations will ensure "uniform norms" for the industry.

Bankers, in the absence of a set pattern, have been following different set of rules to arrive at compromise settlements. Many public sector banks have roped in retired high court judges to head their internal committees on waivers and write-offs. "Despite that, there have been instances when bank managements--guided by vested interests--have resorted to loan waivers or reached compromise settlements with corporates. One such case involving former United Bank of India chairman was brought to the notice of the Tarapore panel on bank frauds. With the formation of guidelines on write-offs, such practices will come to an end," a senior banker said.

Reserve Bank's decision to form a panel comes in the wake of international ratings agency Standard & Poor's severe criticism of domestic banks' accounting norms. Standard & Poor's financial institutions rating director Ken Mclay had said last week that the Reserve Bank gross bad loans' estimate of 17.8 per cent was on account of liberal country definition of non-performing assets and widely prevalent practice of "ever-greening", a euphemism for rescheduling and restructuring of loans to make them good assets.

Domestic banks are required to treat assets as "sub-standard" when borrowers fail to repay the principal and interests for two consecutive quarters (180 days) against the international practice of 45-90 days. The second Narasimham committee has also called for a tightening of asset classification norms. The asset quality of banks has deteriorated over the last one year following the industrial slowdown. "When the industry is in a bad shape, quality of assets is bound to go down. Even though in percentage terms, bad loans have not shown much of growth as banks' advances have grown substantially, in absolute term almost all banks have shown growth in non-performing assets," a public sector bank chairman said.

The panel's inception also follows the central bank's decision to bestow freedom to banks to frame their recovery policies on loans given to sick and weak industrial units. In June this year, the central bank said banks were allowed to take decisions on settlements and write-offs extended to sick units "in accordance with the policy laid down with the approval of the board of directors".

The RBI directive said: "The guidelines issued by the central bank on the rehabilitation of sick/weak units cover funding of unpaid interest/irregular portion of cash credit limit ... and do not normally envisage any write-off of the principal or waiver of interest. We had accordingly advised banks that in cases where a bank chooses to enter into a compromise settlement with a borrower unit involving a one-time settlement with some financial sacrifice, instead of nursing the unit under a rehabilitation programme, the bank would be justified in not extending such finance in any form to the unit except when there is a change in the management/ promoters of the unit.

"The matter has been reviewed and it is felt that in the context of the operational freedom given to banks for framing the lending/recover policy, the guidelines on the provision of finance in the above circumstances should form part of the bank's lending policy. Accordingly, it will be in order for banks to take decisions in individual cases in their discretion, in accordance with the policy laid down with the approval of the board."