Context:

The Reserve Bank of India (RBI) has revised its guidelines on the settlement of dues owed by borrowers. The updated directives emphasize that Asset Reconstruction Companies (ARCs) should consider settlement only after fully exploring all other recovery methods.

Key Guidelines of RBI’s Revised Master Direction for ARCs:

The amendments to the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024 aim to enhance transparency, accountability, and efficiency in debt recovery and settlement processes.

1. Thorough Evaluation Before Settlement: ARCs must exhaust all possible avenues for recovering dues before opting for a settlement to ensure settlements are considered as a last resort.

2. Board-Approved Settlement Policy:

• ARCs are mandated to have a board-approved policy covering:
• Criteria for one-time settlements.
• Permissible sacrifices for secured and unsecured exposures.
• Methodology to assess the realizable value of pledged securities.
• The policy must also ensure the Net Present Value (NPV) of the settlement amount is not below the realizable value of the security. Any discrepancies between initial and current valuations of securities must be justified.

3. Settlement Payments: Lump sum payments are encouraged. If installment payments are considered, ARCs must evaluate the borrower’s business plan, projected earnings, and cash flows to ensure the settlement is feasible and sustainable.

4. Independent Advisory Committee (IAC) Review: Settlements involving outstanding principal amounts exceeding Rs 1 crore must be reviewed by an Independent Advisory Committee (IAC) comprising professionals in finance, law, and technical fields. This ensures settlements are fair and well-justified.

5. Settlement for Fraudulent or Wilful Defaulters: For borrowers categorized as fraudulent or wilful defaulters, ARCs must examine settlement proposals even if criminal proceedings are ongoing. This provision ensures recovery efforts continue without being hindered by legal proceedings.

Objective of the Guidelines: The revised guidelines aim to bring transparency, fairness, and accountability to debt recovery and settlement processes.

·        By requiring thorough evaluations and board-approved policies, RBI ensures settlements are carried out only when they are the most viable and justifiable option, thus protecting the interests of ARCs and borrowers.

What is an Asset Reconstruction Company (ARC)?
An Asset Reconstruction Company (ARC) is a specialized financial institution focused on acquiring and managing distressed assets, primarily non-performing assets (NPAs), from banks and other financial institutions. Banks transfer these troubled assets to ARCs for recovery when borrowers default on their loans.

Regulatory Framework for ARCs:
In India, ARCs operate under the regulatory framework of the RBI and are governed by the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002. This Act empowers ARCs to take legal measures, including possession of collateral assets, to recover dues.