RBI introduces revised framework for ARC-borrower settlements
The Reserve Bank of India (RBI) has issued revised guidelines for the settlement of dues payable by borrowers to Asset Reconstruction Companies (ARCs) on January 20, and to take immediate effect. According to RBI, the revision, issued under Sections 9 and 12 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is intended to improve transparency, accountability, and efficiency in settlement processes carried out by ARCs.
ARCs are now required to frame Board-approved policies governing the settlement of dues. These policies must cover crucial aspects such as the eligibility cut-off dates for one-time settlements, permissible sacrifices for various exposure categories, and methodologies to determine the realizable value of securities. By addressing these areas, the revised guidelines aim to ensure that settlements are executed with clear and transparent protocols. Settlements can only be pursued after all potential avenues for recovery have been thoroughly explored. The Net Present Value (NPV) of the settlement amount must generally be equal to or greater than the realizable value of securities. If significant differences arise between the valuation of securities at the time of acquisition and their value during settlement, the reasons must be documented.
To ensure accountability, settlements should preferably be paid in lump sums. In cases involving instalment payments, acceptable business plans and cash flow projections of the borrower must support the proposals. The guidelines classify settlement procedures based on the outstanding dues of borrowers. For accounts exceeding Rs 1 crore, proposals must first be examined by an Independent Advisory Committee (IAC) comprising professionals with expertise in finance, law, or technical fields. The IAC’s recommendations are then reviewed by the ARC’s Board, including at least two independent directors. A detailed rationale for the Board’s decisions must be recorded in the minutes of the meeting. For accounts with dues of Rs 1 crore or below, the process is streamlined but retains key oversight measures. Officials involved in acquiring financial assets are barred from participating in the settlement process for the same assets.
Additionally, quarterly reports summarizing resolution trends, fraud or wilful default classifications, and recovery timelines must be submitted to the Board. Special provisions have been introduced for settlements involving borrowers classified as frauds or wilful defaulters. ARCs may settle dues in such cases without prejudicing ongoing criminal proceedings. These settlements, regardless of the amount involved, are subject to the same rigorous criteria applicable to larger accounts. The RBI has emphasized that all compromise settlements are governed by existing legal frameworks. In cases where recovery proceedings are underway in judicial forums, settlements will require consent from the relevant judicial authority to ensure compliance with legal standards.
