RBI Guidelines for Asset Reconstruction Companies (ARCs)

The Reserve Bank of India (RBI) has introduced changes to the guidelines for Asset Reconstruction Companies (ARCs) regarding the settlement of dues with borrowers. These changes are aimed at streamlining the recovery process and making it more efficient for ARCs.

Key Changes in Settlement Guidelines

• ARCs can now settle dues with borrowers after evaluating all possible recovery methods, eliminating the previous requirement to exhaust all recovery measures first.
• A board-approved policy must be framed by ARCs for the settlement of dues, which includes: 
  • Cut-off date for one-time settlement eligibility.
  • Permissible haircuts for different exposure categories.
  • Methodology to determine the realizable value of security.
• Previously, an independent advisory committee (IAC) had to examine settlement proposals, which would then be reviewed by the board of directors, including at least two independent directors.

Impact of New Guidelines

• The new guidelines are expected to expedite the resolution process and facilitate easier business operations for bad loan aggregators.
• The settlement amount should ideally be paid as a lump sum.
• For instances where lump sum payment is not possible, the need for IAC recommendations on minimum upfront payment and maximum repayment period has been removed.

Specific Provisions

• Accounts with an aggregate value of ₹1 crore or below can be settled according to the board-approved policy without IAC involvement.
• For accounts with an outstanding principal of more than ₹1 crore, an IAC must examine the proposal. This committee should include professionals from technical, finance, or legal backgrounds.
• The IAC will consider the borrower's financial position, recovery time frame, projected earnings, cash flows, and other relevant factors when making recommendations.
• Accounts classified as frauds or wilful defaulters must undergo IAC scrutiny, regardless of the amount involved.