RBI Tightens Guidelines for ARCs in Borrower Settlements

The Reserve Bank of India (RBI) has introduced stricter guidelines for Asset Reconstruction Companies (ARCs) to enhance transparency and accountability in borrower settlements. These revisions aim to standardize procedures and align them with practices of banks and non-banking financial companies (NBFCs).

Key Revisions in Settlement Procedures

Board-Approved Policies: ARCs are now mandated to establish board-approved policies governing borrower settlements. These policies must detail eligibility criteria for one-time settlements, permissible sacrifices based on exposure categories, and methodologies for determining the realizable value of securities.

Independent Advisory Committee (IAC) Involvement: For borrowers with outstanding dues exceeding ₹1 crore, settlements require evaluation by an IAC comprising professionals with technical, financial, or legal expertise. The IAC will assess the borrower’s financial position, projected earnings, and recovery prospects before making recommendations.

Board Deliberations: 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 detailed rationale, must be recorded in the meeting minutes.

Settlements Below ₹1 Crore: For dues of ₹1 crore or below, ARCs can process settlements based on criteria defined in the board-approved policy. 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.

Enhanced Reporting and Compliance

Quarterly Reporting: ARCs are required to submit quarterly reports on the resolution of accounts, covering aspects such as trends in the number of accounts and amounts subjected to compromise settlements, categorization of fraud and wilful default cases, and recovery timelines.

Settlements Involving Wilful Defaulters or Frauds: 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 ensures no leniency in dealing with such borrowers while not prejudicing ongoing criminal proceedings.

Implementation and Compliance

These revised guidelines are effective immediately. ARCs must ensure compliance with the new procedures to maintain the integrity of the settlement process and protect consumer interests.

Summary of the news

Why in News	Key Points
RBI Amends Directions for Settlements by ARCs	– RBI updates guidelines for Asset Reconstruction Companies (ARCs) to improve transparency and accountability in borrower settlements.
Key Revisions	– ARCs must adopt board-approved policies for borrower settlements.
Independent Advisory Committee (IAC)	– IAC required for settlements of accounts over ₹1 crore, consisting of professionals with technical, financial, or legal expertise.
Board Deliberations	– Board of Directors must review the IAC’s recommendations and alternative recovery options.
Settlements Below ₹1 Crore	– ARCs can process settlements below ₹1 crore based on board policies.
Quarterly Reporting	– ARCs required to submit quarterly reports detailing settlement trends, fraud cases, and recovery timelines.
Settlements Involving Wilful Defaulters/Frauds	– Settlements involving wilful defaulters or frauds will follow stringent rules, regardless of settlement amount.
Effective Date	– Revised guidelines are effective immediately.