The Reserve Bank of India has amended its framework for Asset Reconstruction Companies (ARCs) to settle dues payable by borrowers, updating the relevant provisions in its Master Direction for ARCs with immediate effect. The revised approach requires each ARC to operate under a Board-approved settlement policy and to pursue settlement only after evaluating all feasible recovery options and concluding that settlement is the best available outcome. The updated guidelines set valuation and process expectations, including that the net present value of the settlement amount should generally not be lower than the realisable value of securities, with reasons recorded where there is significant variation from valuations captured at acquisition. Settlements are expected to be paid in lump sum where possible, and instalment-based settlements must be supported by an acceptable business plan (where applicable) and the borrower’s projected earnings and cash flows. For borrowers with aggregate outstanding principal above INR 1 crore (measured in the transferor’s books at the time of acquisition), settlement proposals must be examined by an Independent Advisory Committee and then deliberated by the Board (including at least two independent directors) or a qualifying Board committee, with the decision and rationale recorded. For INR 1 crore and below, settlement is to follow Board-set criteria but must include conflict-of-interest safeguards for officials involved in the original acquisition and enhanced quarterly Board reporting, including trends, fraud and wilful defaulter breakouts, and recovery timelines. Accounts classified as fraud or wilful default must follow the higher-governance process irrespective of amount, and settlements may proceed without prejudice to ongoing criminal proceedings; where recovery proceedings are pending in a judicial forum, any settlement is subject to obtaining a consent decree and remains without prejudice to other applicable statutes. The Master Direction is being updated accordingly.
Reserve Bank of India 2025-01-20
Reserve Bank of India revises Asset Reconstruction Companies rules for borrower settlements, mandating independent advisory review above INR 1 crore
The Reserve Bank of India revised its framework for Asset Reconstruction Companies (ARCs) to improve borrower dues settlements. ARCs must now follow a Board-approved settlement policy, ensuring settlements occur only after evaluating all recovery options. Key provisions include valuation expectations, lump sum payments, and oversight by an Independent Advisory Committee for settlements above INR 1 crore, with enhanced governance for fraud or wilful default cases.