RBI Introduced Revised Guidelines for ARC-Borrower Settlements

On January 20 2025, the Reserve Bank of India (RBI) introduced revised guidelines for the settlement of dues payable by borrowers to Asset Reconstruction Companies (ARCs) under the Master Direction- Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024. These guidelines came into force with immediate effect.

• These revised guidelines were issued through a circular in exercise of powers given by Sections 9 and 12 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security(SARFAESI ) Act, 2002 (54 of 2002).
• These revised norms aimed to enhance transparency, accountability, and efficiency in settlement processes carried out by ARCs.

Key Changes:

i.As per the new norms, it is mandatory for every ARC to frame a Board-approved policy for settlement of dues payable by the borrowers.

• These policies are required to cover important aspects such as: cut-off date for one-time settlement eligibility, permissible concessions based on exposure categories, and valuation methodologies for settling dues.
• The revised norms mandated that the ARC’s Board of Directors should include a minimum two independent directors.

Criteria Settlement of Dues Based on Outstanding Amount:

i.For Borrowers with outstanding dues more than 1 crore: In this case, settlement of dues will be done only after the proposal is thoroughly examined by an Independent Advisory Committee (IAC), which shall comprise professionals with expertise in finance, law, or technical fields.

ii.For Borrowers with outstanding dues of Rs 1 crore or below: In this case, settlements can be approved by an official who was not part of the acquisition (as an individual or part of a committee).

• A quarterly report detailing trends and recovery timelines for these accounts must be submitted before the Board or Committee of the Board.

Other Key Points:

i.ARC has been mandated to constitute an IAC for examining  the proposals related to change in or takeover of management of business of the borrower.

ii.The Committee is chaired by an independent director and has at least two independent directors, including the chair.

• Or, it should consist of minimum 1/3rd (33%) of the total strength of the board or 3 directors, whichever is higher.

About Asset Reconstruction Company (ARC):

i.It is a Financial Institution (FI) that buys Non-Performing Assets (NPAs) or bad loans from banks and FI and help them to recover from the NPAs.

ii.They are registered with RBI and are regulated under SARFAESI Act, 2002.

iii.The Net Owned Funds (NOFs) of ARCs should be Rs 100 crore or more and they are also require to maintain a capital adequacy ratio (CAR) of 15% of its risk-weighted assets.

iv.Some of the renowned ARCs in India are: Edelweiss Asset Reconstruction Company Limited (EARCL), National Asset Reconstruction Company Limited (NARCL), among others.