RBI eases norms for ARCs, streamlines borrower dues settlement process

The Reserve Bank of India (RBI) on Monday eased norms pertaining to settlement of dues between asset reconstruction companies (ARCs) and borrowers, making such rules almost in line with banks and non-banking financial companies (NBFCs).

 

Now, dues above Rs 1 crore can be settled based on board approved policy and a committee of the board can take the decision.

 

Earlier, such settlements needed the board’s approval.

 

The revised norms mandated that the committee should be chaired by an independent director and have a minimum two independent directors, including the chair.

 

Or, it should consist of at least one-third of the total strength of the board or three directors, whichever is higher.

 

An independent advisory committee (IAC) comprising professionals having technical/ finance/ legal background should examine the proposal and give its suggestion to the ARC.

 

The committee of the board shall deliberate on the recommendations of the IAC and consider various options available for recovery.

 

This will be before deciding whether the option of settlement of dues with the borrower is the best option available under the existing circumstances.

 

“Settlement with the borrower shall be done only after all possible ways to recover the dues have been ‘examined’ and settlement is considered the best option available,” the revised norms said.

 

Earlier, ARCs could do settlement only after all possible steps to recover dues were ‘exhausted’ and there are no further prospects of recovering the debt.

 

Settlements of dues of less than Rs 1 crore can be approved by an official who was not part of the acquisition (as an individual or part of a committee) of the concerned financial assets, in any capacity.

 

Earlier, settlement proposals for dues up to Rs 1 crore principle outstanding had to be examined by the IAC of the ARC.

 

Hari Hara Mishra, chief executive officer (CEO), Association of ARCs in India, said revised guidelines will make the settlement process easier.

 

“The settlement guidelines earlier had a one-size-fits-all approach. For small loans running into lakhs, implementing the guidelines was proving a nightmare,” Mishra told Business Standard. Now the guidelines have been rationalised, with special dispensation for small loans with principal outstanding below Rs 1 crore, said Mishra.

 

The company should place quarterly reports on resolution of such accounts before the board or panel of the board.

 

Moreover, it is mandated that the net present value (NPV) of the settlement should generally be not less than the realisable value of securities.

 

“If there is a significant variation between valuation of the securities recorded at the time of acquisition of financial assets and realisable value assessed at the time of entering into a settlement, reasons thereof shall be duly recorded,” the RBI said.

 

RBI said every ARC should frame a board-approved policy for settlement of dues payable by the borrower.

 

This policy should cover aspects such as cut-off date for one-time settlement eligibility and permissible sacrifice for various categories of exposures while arriving at the settlement amount, it added.

 

The revised norms come into effect immediately. 

What has changed 

Dues above Rs 1 crore 

Now: Can be settled based on board-approved policy and a panel of the board can take the decision 

Earlier: Such settlements needed the board’s approval 

Settlements of dues of less than Rs 1 crore  Now: Can be approved by an official who was not part of the acquisition of the concerned financial assets

Earlier: The Independent Advisory Committee  of ARC examined such proposals