The Reserve Bank of India (RBI) has revised guidelines on settling dues payable by asset restructuring companies (ARCs) borrowers. ARCs play a critical role in the resolution of stressed financial assets of banks and financial institutions, enhancing the health of the financial system. To ensure the efficient functioning of ARCs and to protect the interest of investors, the RBI issued the Master Direction – Reserve Bank of India (Asset Reconstruction companies) Directions, 2024, in April 2024. These guidelines outline rules for the registration and activities of ARCs and guidelines on asset reconstruction and securitisation.

Here are the revised guidelines issued by the central bank:

1) The revised guidelines say every ARC will frame a board-approved policy for the settlement of dues payable by the borrowers. This will cover the cut-off date for one-time settlement eligibility, permissible sacrifice for various categories of exposures while arriving at the settlement amount, and methodology for arriving at the realisable value of the security.

2) Settlement with the borrower will be done only after all possible ways to recover the dues have been examined and settlement is considered the best option available.

3) 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, reasons will be duly recorded, says the RBI.

4) The settlement amount should preferably be paid in a lump sum, the new guidelines say. "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, projected earnings and cash flows of the borrower."

5) The settlement of accounts, about a borrower having an aggregate value of more than ₹1 crore in terms of outstanding principal in the books of transferors at the time of acquisition by the ARC, will be done as per board-approved policy.

6) The settlement is subject to two conditions: Settlement of dues with the borrower will be done only after the proposal is examined by an independent advisory committee (IAC) and the board will deliberate on its recommendations and consider options available for the recovery of dues before deciding whether the option of settlement of dues with the borrower is the best option available.

7) The settlement of accounts about a borrower having an aggregate value of ₹1 crore or below in terms of principal outstanding in the books of transferors at the time of acquisition by the ARC will be done as per the criteria prescribed by the authority in the board-approved policy. 

8) The conditions for such accounts are that any official, who was part of the acquisition of the concerned financial asset will not be part of processing the proposal for settlement of the same financial asset and a quarterly report on the resolution of these accounts will be placed before the board.

9) For the settlement of dues payable by the borrowers, classified as frauds or willful defaulters, the RBI's guidelines on ARCs will be applicable, irrespective of the amount involved. ARCs may undertake the settlement of dues in respect of accounts categorised as willful defaulters or fraud without prejudice to the criminal proceedings underway against such borrowers.

10) The compromise settlements with the borrowers should be without prejudice to the provisions of any other statute in force, says the RBI. Wherever ARCs had commenced recovery proceedings, any settlement arrived will be subject to obtaining a consent decree from the concerned judicial authorities.