The Reserve Bank of India (RBI) has recently allowed banks to make compromise settlements with wilful defaulters, which are individuals or entities who deliberately default on loans despite having the ability to repay them. This move is expected to have the following impacts on the Indian economy:

• Improved speed of recovery: The decision could help banks recover their bad loans faster than before, which would reduce their stress and improve their loan books.
• Reduction in legal hurdles: The compromise settlement route could simplify the legal process of loan recovery, which is currently viewed as a time-consuming and cumbersome process.
• Risk of moral hazard: The RBI's decision might encourage wilful defaulters to take more risks with borrowed money in the future. This could lead to a rise in the incidence of wilful defaults, posing a potential threat to the health of the banking system.
• Improved investor confidence: Settlements with wilful defaulters could improve the investor perception of the banking industry and the overall economy. This could potentially attract more investment into the country.

Overall, the RBI's decision to allow compromise settlements with wilful defaulters is likely to have an immediate and significant impact on the banking industry. The benefits of faster loan recovery and the reduction in legal hurdles could be significant, but there could also be long-term risks associated with a potential rise in wilful defaults.