MUMBAI: The Reserve Bank of India (RBI) has introduced a comprehensive set of guidelines aimed at improving the settlement procedures between Asset Reconstruction Companies (ARCs) and borrowers. Effective immediately, these directives are designed to bolster transparency, accountability, and operational efficiency in the recovery of non-performing assets (NPAs).
Key Highlights of the Revised Guidelines:
- Board-Approved Policies: ARCs are mandated to develop and implement Board-approved policies that govern the settlement of dues. These policies must address critical aspects such as eligibility criteria for one-time settlements, permissible concessions across various exposure categories, and methodologies for determining the realizable value of securities.
- Exhaustion of Recovery Options: Settlements can only proceed after all potential avenues for recovery have been thoroughly explored. The Net Present Value (NPV) of the settlement amount must generally be equal to or greater than the realizable value of securities. Any significant differences between the valuation of securities at the time of acquisition and their value during settlement must be documented.
- Payment Structures: To ensure accountability, settlements should preferably be paid in lump sums. In cases involving installment payments, acceptable business plans and cash flow projections of the borrower must support the proposals.
- Independent Advisory Committee (IAC): For accounts exceeding ₹1 crore, proposals must first be examined by an Independent Advisory Committee comprising professionals with expertise in finance, law, or technical fields. The IAC’s recommendations are then reviewed by the ARC’s Board, including at least two independent directors. A detailed rationale for the Board’s decisions must be recorded in the minutes of the meeting.
- Streamlined Process for Smaller Accounts: For accounts with dues of ₹1 crore or below, the process is streamlined but retains key oversight measures. Officials involved in acquiring financial assets are barred from participating in the settlement process for the same assets.
- Reporting and Compliance: ARCs are required to submit quarterly reports summarizing resolution trends, fraud or wilful default classifications, and recovery timelines to their Board. Additionally, settlements involving borrowers classified as frauds or wilful defaulters may proceed without prejudicing ongoing criminal proceedings, provided they adhere to the same rigorous criteria applicable to larger accounts.
- Legal Framework Compliance: All compromise settlements are governed by existing legal frameworks. In cases where recovery proceedings are underway in judicial forums, settlements will require consent from the relevant judicial authority to ensure compliance with legal standards.
These revised guidelines are expected to enhance the effectiveness of ARCs in managing distressed assets, ensuring that settlements are conducted with greater transparency and adherence to established protocols. By implementing these measures, the RBI aims to strengthen the financial system’s resilience and promote responsible lending and borrowing practices.
