Revised Guidelines on Settlement of Dues by Borrowers to ARCs
The Reserve Bank of India (RBI) has revised its guidelines on the settlement of dues payable by borrowers to Asset Reconstruction Companies (ARCs). These updates are part of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, originally issued on April 24, 2024. The revised provisions, effective immediately, aim to enhance transparency, accountability, and fairness in the settlement processes undertaken by ARCs.
Key Provisions
Board-Approved Policies
Every ARC must develop a Board-approved policy for the settlement of dues. This policy should outline the eligibility criteria for one-time settlements, permissible sacrifices across exposure categories, and methodologies for determining the realizable value of securities.
Settlement as a Last Resort
Before opting for settlement, ARCs are required to exhaust all recovery options. Settlements should be considered only when deemed the best available course of action.
Valuation and Payment Terms
The Net Present Value (NPV) of the settlement amount must generally not be less than the realizable value of the securities. Any significant discrepancy between the initial and current valuations must be documented. Preferably, settlement amounts should be paid in lump sum; however, installment payments are permitted if supported by acceptable business plans and projected cash flows.
Settlements Above ₹1 Crore
For accounts with an outstanding principal above ₹1 crore (at the time of acquisition by the ARC), settlements must follow these steps:
- Proposals are examined by an Independent Advisory Committee (IAC), comprising professionals with technical, financial, or legal expertise. The IAC assesses the borrower’s financial position, recovery timeline, and projected cash flows.
- The Board of Directors, including at least two independent directors, deliberates on the IAC’s recommendations and explores all recovery options before approving a settlement.
Settlements Below ₹1 Crore
For accounts below ₹1 crore, the settlement process is governed by Board-approved criteria. Officials involved in acquiring the financial asset cannot participate in processing or approving its settlement. Quarterly reports on these accounts must be submitted to the Board for review.
Fraud and Wilful Default Cases
Settlement of dues for borrowers classified as frauds or wilful defaulters must follow the stricter provisions applicable to cases above ₹1 crore, irrespective of the amount involved. These settlements proceed without prejudice to ongoing criminal proceedings.
Legal and Judicial Compliance
Compromise settlements must align with existing laws. If recovery proceedings are pending in court, settlements require a consent decree from the judiciary.
These guidelines underscore RBI’s focus on maintaining accountability while enabling ARCs to manage and resolve stressed assets effectively.
