The Reserve Bank of India (RBI) has tightened guidelines to streamline and enhance the framework for Asset Reconstruction Companies (ARCs) when settling dues payable by borrowers.
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ARCs are required to establish a board-approved policy for settling borrower dues. This policy must outline key elements such as eligibility criteria for one-time settlements, permissible sacrifices based on the exposure category, and methods for calculating the realizable value of securities.
The settlement process should only be initiated after all other avenues for recovering dues have been explored and deemed ineffective, RBI said.
The guidelines mandate that the net present value (NPV) of the settlement amount should generally not fall below the realisable value of the underlying securities.
Suppose there is any significant deviation between the valuation at the time of acquiring the financial asset and the realizable value during settlement. In that case, ARCs must document the reasons for the variation, the new guidelines said.
The RBI has emphasised that settlement amounts should preferably be paid in a lump sum. In cases where staggered payments are proposed, ARCs must evaluate the borrower’s business plan, projected earnings, and cash flows to ensure viability.
For borrowers with outstanding dues above ₹1 crore at the time of acquisition by the ARC:
– An Independent Advisory Committee (IAC), comprising experts in technical, financial, or legal fields, must assess the borrower’s financial position, projected recovery timelines, and other relevant factors.
– The ARC Board, including at least two independent directors, must deliberate on the IAC’s recommendations and evaluate all available recovery options before approving any settlement. The decision must be recorded with a detailed rationale.
For smaller accounts with dues up to ₹1 crore, the RBI has set additional safeguards:
– Officials involved in the acquisition of the financial asset cannot participate in the settlement process.
– ARCs must present quarterly reports to their Board, detailing trends in compromised settlements, including cases involving fraud or willful default, categorized by acquisition authority, business segment, and recovery timelines.
RBI clarified that the limit of ₹1 crore will be the aggregate outstanding principal of all the borrower’s accounts acquired by the ARC from the transferor/s.
The guidelines allow ARCs to settle accounts of borrowers classified as frauds or willful defaulters, provided the settlement process adheres to the framework applicable to larger accounts. RBI said these settlements must not impede ongoing criminal proceedings.
The RBI has clarified that compromise settlements must comply with all relevant legal statutes. Additionally, for cases pending before judicial forums, any settlement agreement must be validated through a consent decree from the respective authority.
