Settlement of dues only after examining all options, RBI to ARCs

The RBI on Monday (January 20, 2025) modified guidelines related to Asset Reconstruction Companies (ARCs), envisaging that settlement with the borrower should be undertaken only after all possible ways to recover dues have been examined.

After a review, it has been decided to revise guidelines on the settlement of dues payable by the borrowers to ARCs, a Reserve Bank circular said.

The 'Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024' is also being updated accordingly, it added.

Every ARC should frame a board-approved policy for the settlement of dues payable by the borrowers.

According to the latest guidelines, the policy should, inter alia, cover aspects like a cut-off date for one-time settlement eligibility, permissible sacrifice for various categories of exposures while arriving at the settlement amount and the methodology for arriving at the realisable value of the security.

"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," the RBI said.

It further said 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," the circular said.

The guidelines provide procedures to be followed in cases where the settlement of accounts pertaining to a borrower with an aggregate value of more than ₹1 crore or less.

The Net Present Value (NPV) of the settlement amount should generally be not less than the realisable value of securities.

As per the circular, if there is a significant variation between the valuation of the securities recorded at the time of acquisition of financial assets and the realisable value of the securities assessed at the time of entering into a settlement, the reasons thereof should be duly recorded.

Further, wherever ARCs had commenced recovery proceedings under a judicial forum and the same is pending before such judicial forum, any settlement arrived at with the borrower shall be subject to obtaining a consent decree from the concerned judicial authorities.