RBI Revises Guidelines on Settlement of Dues by Asset Reconstruction Companies

The Reserve Bank of India (RBI) has announced revised guidelines for the settlement of dues payable by borrowers of Asset Reconstruction Companies (ARCs). These updates, outlined in Paragraph 15 of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, aim to streamline the process and ensure transparency in settlements.

Key Highlights of the Revised Guidelines

• Board-Approved Policies:
  Each ARC is required to establish a Board-approved policy outlining the process for settling borrower dues. This includes defining eligibility criteria for one-time settlements, determining permissible sacrifices for various exposures, and methodologies for valuing securities.
• Exhaustive Recovery Attempts:
  Settlements can only be undertaken after all other recovery options have been thoroughly explored and determined to be less viable than a compromise settlement.
• Net Present Value (NPV) Benchmarking:
  The settlement amount’s NPV should generally match or exceed the realizable value of the securities. Any significant deviations in valuation must be documented with a detailed rationale.
• Payment Structure:
  Settlements should ideally involve lump-sum payments. Where instalments are agreed upon, they must be supported by a viable business plan and the borrower’s projected earnings.
• Independent Advisory Committee (IAC) Oversight:
  For accounts exceeding ₹1 crore in outstanding principal, settlement proposals must be reviewed by an IAC. The committee, comprising financial, legal, and technical professionals, will assess the borrower’s financial position, recovery prospects, and other factors before making recommendations to the ARC.
• Board Approval:
  The ARC’s Board, including at least two independent directors, will deliberate on the IAC’s recommendations and record detailed reasons for approving or rejecting the settlement proposal.
• Quarterly Reporting for Smaller Accounts:
  For accounts with outstanding principals of ₹1 crore or less, settlements will follow Board-approved policies, with detailed quarterly reports presented to the Board for oversight.
• Fraud and Wilful Default Cases:
  Strict guidelines have been laid down for accounts involving fraud or wilful defaulters. Settlements in such cases will follow the protocols for larger accounts, ensuring the process does not interfere with ongoing criminal proceedings.
• Judicial Oversight:
  In cases where legal recovery proceedings are underway, settlements require approval through a consent decree from the judicial authority concerned.

These revised guidelines, effective immediately, underscore the importance of transparency, due diligence, and accountability in the settlement of dues by ARCs. They ensure a systematic approach while preserving the rights of ARCs and financial institutions in recovering dues.