The Reserve Bank of India (RBI) has provided a level playing field for Asset Reconstruction Companies (ARCs) with banks and non-banking finance companies on settlement of dues payable by borrowers.

ARCs now have a relatively free hand in settling borrower dues of up to ₹1 crore, going by the revised guidelines on settlement of dues of borrowers by ARCs.

In the case of settlement of borrower dues above ₹1 crore, either the Board or a committee of the board can take a call. Earlier, this power was vested only with the Board.

The aforementioned relaxations are expected to streamline the functioning of ARCs.

“The revised guidelines on settlement by ARCs now facilitates ease of doing resolution of small loans. Earlier the process was cumbersome and impracticable in respect of thousands of small loans settlement. These modifications will have a galvanising effect on the ARCs,” Hari Hara Mishra, CEO, Association of ARCs in India

Revised guidelines

The central bank has also done away with the criteria that required an independent advisory committee (IAC) to examine proposals for settlement of borrower accounts having an aggregate value of ₹1 crore or below (in terms of principal outstanding in the books of transferor/s) at the time of acquisition by the ARC.

The ARCs had requested the central bank to withdraw the prescription regarding examination of settlement proposals of borrowers with dues of ₹1 crore or below by an IAC and deliberations of the IAC recommendations by the Board.

The reason for this request was that each ARC was dealing with thousands of small value cases, which required the Board to meet more frequently to clear IAC’s recommendations. This was a tall order. Henceforth, such cases need not go to IAC and the Board.

When it comes to settlement of borrower accounts having aggregate value of more than ₹1 crore (in terms of principal outstanding in the books of transferor/s) at the time of acquisition by the ARC, RBI said either the Board of Directors or a Committee of the Board can deliberate on the recommendations of IAC. Earlier, only the Board could deliberate on the recommendations of IAC.

Settlement of small value cases

The central bank said any official who was part of the acquisition (as an individual or part of a committee) of a financial asset cannot be part of processing/approving the settlement proposal of the same financial asset, in any capacity.

A quarterly report on the resolution of small value accounts has to be placed before the Board/ Committee of the Board.

The Board is required to mandate a suitable reporting format to ensure adequate coverage of aspects (at the minimum) such as trend in number of accounts and amounts subjected to compromise settlement (q-o-q and y-o-y); separate breakup of accounts classified as fraud, wilful default declared by the banks and NBFCs.

The format should also include amount-wise, acquisition authority wise, and business segment / asset-class wise grouping of such accounts; and extent and timelines of recovery in such accounts.

Settlement of bigger accounts

RBI said settlement of dues with the borrower can be done only after the proposal is examined by IAC.

The IAC, after assessing the financial position of the borrower, time frame available for recovery of the dues from the borrower, projected earnings & cash flows of the borrower and other relevant aspects, will give its recommendations to the ARC regarding settlement of dues with the borrower.

The Board of Directors including at least two independent directors or a Committee of the Board will deliberate on the recommendations of IAC.

They will consider various options available for recovery of dues before deciding whether the option of settlement of dues with the borrower is the best option available under the existing circumstances. The decision, along with detailed rationale, will be specifically recorded in the minutes of the meeting.

For settlement of dues, irrespective of the amount involved, payable by the borrowers classified as frauds or wilful defaulters, ARCs can undertake settlement of dues without prejudice to the criminal proceeding underway against such borrowers.

Published on January 20, 2025