RBI introduces revised framework for ARC-borrower settlement
Mumbai Mumbai: The Reserve Bank of India (RBI) on Monday (January 20) issued revised guidelines to asset reconstruction companies (ARCs) for settlement of dues payable by borrowers, and these will come into force with immediate effect. According to the RBI, the amendments issued under Sections 9 and 12 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are aimed at improving transparency, accountability and efficiency in the settlement processes undertaken by ARCs. ARCs are now required to formulate board-approved policies governing settlement of dues. These policies should cover key aspects such as eligibility cut-off dates for one-time settlement, acceptable sacrifices for different risk categories and methodologies for determining the realisable value of securities. By addressing these areas, the revised guidelines aim to ensure that settlements are executed with clear and transparent protocols. Settlements can only be carried out when all possible avenues of recovery have been fully explored. The net present value (NPV) of the settlement amount should generally be equal to or greater than the realisable value of the securities.
If significant differences arise between the valuation of securities at the time of acquisition and their value at the time of settlement, the reasons should be documented.To ensure accountability, the settlement should preferably be paid in a lump sum. In cases involving payment in instalments, the borrower’s acceptable business plans and cash flow projections should support the proposals.
The guidelines classify settlement processes based on the outstanding dues of borrowers. For accounts above Rs 1 crore, the proposals should first be scrutinised by an independent advisory committee (IAC), comprising professionals with expertise in finance, law or technical fields. The recommendations of the IAC are reviewed by the board of the ARC, comprising at least two independent directors. A detailed rationale for the board’s decisions should be recorded in the minutes of the meeting.
