New RBI rules mandate stricter oversight on ARC-borrower settlements

As per the new guidelines, every Asset Reconstruction Company must establish a Board-approved policy that governs the settlement of borrower dues

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The Reserve Bank of India (RBI) has issued new rules aimed at streamlining and tightening the settlement process for dues payable by borrowers to Asset Reconstruction Companies (ARCs). The revised framework by the RBI, announced through a circular on Monday (January 20), mandates that ARCs adopt a more structured approach to settle dues while ensuring transparency and accountability in their operations.

 

As per the new guidelines, every ARC must establish a Board-approved policy that governs the settlement of borrower dues. The policy is required to address critical aspects such as eligibility criteria for one-time settlements, permissible sacrifices based on exposure categories, and methodologies to determine the realisable value of securities.

 

Meanwhile, for borrowers with outstanding dues exceeding Rs 1 crore, settlements can only proceed after a thorough evaluation by an Independent Advisory Committee (IAC), the RBI said. This committee has to comprise experts with technical, financial, or legal expertise, who will assess the borrower’s financial position, projected earnings, and recovery prospects before making recommendations to the ARC.

 

Further, the Board of Directors, including at least two independent directors, must deliberate on the IAC’s recommendations and evaluate alternative recovery options. The Board’s decision, along with the rationale, must be meticulously documented in meeting minutes.

 

For dues of Rs 1 crore or below, ARCs can process settlements based on criteria defined in the Board-approved policy, the guidelines stated. However, officials involved in acquiring the financial asset cannot participate in the approval of the settlement to prevent conflicts of interest. Additionally, the Board must review quarterly reports detailing trends and recovery timelines for these accounts.

 

The revised framework emphasised on robust reporting requirements, including periodic analysis of accounts settled through compromise. This analysis has to include details such as trends in settled accounts, categorisation of fraud and wilful default cases, and recovery timelines, the circular said.

 

Meanwhile, settlements involving borrowers classified as wilful defaulters or frauds will follow the same stringent procedures applicable to high-value accounts, irrespective of the settlement amount. This measure ensures no leniency in dealing with such borrowers while not prejudicing ongoing criminal proceedings, the RBI said.

 

ARCs are also required to ensure that settlements comply with existing laws and obtain consent decrees from judicial authorities when recovery proceedings are already underway. This safeguards the integrity of settlements and aligns them with ongoing legal actions.