Guidelines On Settlement Of Dues Of Borrowers By ARCs

Posted On - 10 February, 2025 • By - Abhishek Bagga

On January 20, 2025, the Reserve Bank of India (RBI) issued a circular (RBI/2024-25/106) introducing revised guidelines for how ARCs can settle outstanding dues.[1] These updates aim to make the settlement process more transparent, efficient, and fair, ensuring better outcomes in handling stressed assets.

Background

The updated guidelines revise Paragraph 15 of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024.[2] While the RBI has not explicitly stated the reasons for these changes, they likely aim to strengthen regulations, ensure consistency in Asset Reconstruction Companies (ARCs) operations, and enhance the efficiency of resolving stressed assets. This aligns with the RBI’s broader goal of refining the regulatory framework for ARCs and reinforcing their role in maintaining financial stability.

The guidelines also clarify that settlement with borrowers should only be considered as a last resort, after all other reasonable recovery efforts have been exhausted.

Key Provisions of the Revised Guidelines

Board-Approved Policy

Each ARC is mandated to formulate a comprehensive, board-approved policy governing the settlement of dues. This policy must, inter alia, address the following key elements:

  • A defined cut-off date for determining eligibility for one-time settlements;
  • Clearly defined parameters for permissible sacrifice for different categories of exposures when arriving at the final settlement amount;
  • A robust and transparent methodology for determining the realisable value of the security underlying the stressed asset.

Net Present Value (NPV) and Realisable Value

 A key principle of the revised guidelines is that the settlement amount’s Net Present Value (NPV) should generally not be lower than the realisable value of the underlying securities. If there is a significant difference between the initial valuation of the securities (at the time of acquisition) and their realisable value during the settlement process, the ARC must carefully document the reasons for this discrepancy.

Payment Modality

The guidelines have prioritized lump-sum based payments. It also acknowledges that it may not be possible in every scenario. In such cases, installment-based payments are allowed under specific conditions. Installment-based payments proposal must be backed by:

  • a credible business plan (if applicable);
  • realistic projections of the borrower’s future income;
  • cash flows, demonstrating their ability to meet the agreed payment schedule.

Settlement for High-Value Accounts (Above INR 1 Crore)

For cases where the outstanding principal exceeds INR 1 crore at the time of acquisition by the ARC, stricter scrutiny applies:

  • An Independent Advisory Committee (IAC), consisting of experts in financial, technical, and legal matters, must be involved. The committee will assess the borrower’s financial health, recovery timeline, projected cash flows, and other key factors before making recommendations to the ARC on the settlement;
  • The ARC’s Board of Directors (or a designated Board Committee with at least two independent directors) must carefully review the IAC’s recommendations. Before approving a settlement, they must ensure it is the best possible course of action and record a detailed justification in the meeting minutes.

Settlement for Lower-Value Accounts (INR 1 Crore or Below)

For accounts with outstanding principal of ₹1 crore or less, the settlement process is guided by criteria defined within the ARC’s board-approved policy, subject to the following safeguards:

To prevent conflicts of interest, any official involved in the acquisition of the financial asset is prohibited from participating in any capacity in the processing or approval of its settlement.

The ARC must submit a quarterly report to the Board/Committee (meeting the criteria for high-value accounts) detailing the resolution of these accounts. The report must adhere to a prescribed format, covering at a minimum: (i) trends in the number and amount of compromise settlements (quarter-on-quarter and year-on-year); (ii) a breakdown of accounts classified as fraud or wilful default; (iii) a categorization of accounts by amount, acquisition authority, and business segment/asset class; and (iv) the extent and timelines of recovery achieved.

Settlement for Fraudulent and Wilful Defaulters

The stringent guidelines applicable to high-value accounts (above ₹1 crore) also extend to cases involving borrowers classified as frauds or wilful defaulters, irrespective of the outstanding amount.  The guidelines explicitly clarify that settlement in these cases does not preclude or prejudice any ongoing criminal proceedings.

Final Words

These guidelines are set to bring significant changes to how ARCs operate and how they interact with borrowers. These changes could improve the efficiency of stressed asset resolution. This would ensure a higher rate of recovery. However, there are implementational challenges. Complex asset valuations and uncooperative borrowers could make compliance difficult. The requirement for detailed documentation and justification might also increase the administrative workload for ARCs.

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12771&Mode=0.

[2] https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12669.

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Mangalore | Pune | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com