RBI Unveils New Guidelines for Asset Reconstruction Settlements

The Reserve Bank of India has announced new guidelines for Asset Reconstruction Companies regarding borrower dues. Effective immediately, these rules aim to enhance transparency and efficiency. Key changes include Board-approved policies, valuation protocols, and involvement of independent advisors for high-value accounts.

The Reserve Bank of India (RBI) has introduced revised directives for the settlement of borrower dues with Asset Reconstruction Companies (ARCs), effective immediately. Announced on Monday, January 20, the rules aim to bolster transparency, accountability, and operational efficiency within the settlement procedures, as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Under the new guidelines, ARCs must establish Board-sanctioned policies that address essential aspects such as eligibility cut-off dates for settlements, permissible sacrifices for assorted exposure categories, and methods to determine the realizable value of securities. These measures are designed to ensure settlements are conducted with transparency and adherence to clear protocols.

The RBI mandates that settlements should only proceed after all recovery options have been exhausted. The settlement amount's Net Present Value must generally match or exceed the securities' realizable value. Any significant variance between the securities' original and settlement valuations necessitates documentation.

The guidelines further recommend lump sum payments to ensure accountability, while instalment plans must be corroborated with sound business strategies and borrower cash flow projections. For accounts over Rs1 crore, an Independent Advisory Committee (IAC) of specialists will assess proposals before ARC Board consideration, requiring documentation of all Board decisions.

For smaller accounts with dues of Rs1 crore or less, a streamlined process with vital oversight remains. Officials involved in asset acquisition cannot participate in their settlement process. Furthermore, ARCs must report quarterly on resolution trends, fraud classifications, and recovery schedules and may settle dues of borrowers marked as fraud or wilful defaulters, preserving ongoing legal proceedings unaffected.

All settlements, regardless of amount, must comply with stringent legal frameworks. Should a settlement involve active recovery in judicial forums, the approval from the corresponding judicial authority is necessary to uphold legal conformity.

(With inputs from agencies.)