ARCs Must Opt for Settlement of Dues only after Examining All Options: RBI

Moneylife Digital Team 21 January 2025

Investor Interest

Modifying its guidelines on the settlement of dues of borrowers by asset reconstruction companies (ARCs), the Reserve Bank of India (RBI) says ARCs should use the settlement option only after examining all possible ways to recover dues.

RBI revised its guidelines and the amended paragraph 15 of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024 says, "Settlement with the borrower shall be done only after all possible ways to recover the dues have been examined and settlement is considered as the best option available."

As per the amendment, every ARC should frame a board-approved policy for the settlement of dues payable by the borrowers. "This policy should cover aspects such as the cut-off date for one-time settlement eligibility, permissible sacrifice for various categories of exposures while arriving at the settlement amount, methodology for arriving at the realisable value of the security," RBI says.

Further, the banking regulator says the net present value (NPV) of the settlement amount should generally be not less than the realisable value of securities. "If there is a significant variation between the valuation of the securities recorded at the time of acquisition of financial assets and realisable value of the securities assessed at the time of entering into a settlement, reasons thereof shall be duly recorded."

"The settlement amount should preferably be paid in a lump sum. Where the settlement does not envisage payment of the entire amount agreed upon in one instalment, the proposals should be in line with and supported by an acceptable business plan (where applicable), projected earnings and cash flows of the borrower," RBI adds.

Settlement of accounts pertaining to a borrower having an aggregate value of more than Rs1 crore in terms of outstanding principal at the time of acquisition by the ARC should be done after the proposal is examined by an independent advisory committee (IAC) consisting of professionals having technical, finance and legal background.

For settlement of dues payable by the borrowers classified as frauds or wilful defaulters, irrespective of the amount, the proposal should be examined by the ARC, RBI says. "ARCs may undertake settlement of dues in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such borrowers."

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