RBI streamlines guidelines for ARC – borrower settlements

On 20-1-2025, the Reserve Bank of India notified issued a circular modifying the provisions for Settlement of dues payable by the borrower in Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024. The provisions came into force on 20-1-2025.

Key Points:

RBI has mandated for every ARC to frame a Board approved policy for settlement. This policy will have to cover aspects such as cut-off date for one-time settlement eligibility, methodology, permissible sacrifice for categories of exposures and at the same time arriving at the settlement amount.

1. RBI has introduced some new provisions:

   • Borrowers with outstanding dues of more than Rs. 1 crore can only settle their amount after the IAC has done its thorough evaluation.

     • IAC will consist of professionals having technical/ finance/legal background;

     • IAC will give its recommendations to ARC after assessing financial position of the borrower, time frame available for recovery of the dues from the borrower, projected earnings & cash flow;

     • The Board of Directors will include 2 independent directors.

   • Settlement of borrowers with outstanding dues of Rs. 1 crore or below will be done as per the criteria prescribed by the authority in Board- approved policy:

     • Any official who was a part of the acquisition of the financial asset will not be part of processing/ approving the proposal for settlement of the same financial asset.

     • A quarterly report will have to be placed before the Board.

     • Board will also mandate a suitable reporting format to ensure adequate coverage of various aspects.

   • Settlement of dues payable by the borrowers classified as frauds/ willful defaulters will be done without prejudice.

   • Where ARC has commenced recovery proceedings under a judicial forum and the same is pending before judicial forum, any settlement arrived will be subject to obtaining a consent decree from the judicial authority concerned.

Note: To read more about the Master Direction on Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024 click here.