Key Highlights
- All ARCs must now operate under board‑approved settlement policies that spell out eligibility, exposure‑based concessions, and valuation methods.
- Borrowers owing more than ₹1 crore are subject to review by an independent advisory committee (IAC) comprising technical, financial and legal specialists.
- The Board, with at least two independent directors, must discuss the IAC’s advice, consider alternate recovery routes, and document the rationale in minutes.
- For accounts up to ₹1 crore, settlements can proceed under the board policy, provided the asset‑acquisition team is excluded from approval to avoid conflicts.
- ARCs are obligated to furnish quarterly reports on settlement trends, fraud classifications, and recovery timelines, with wilful defaulters treated under the same rigorous regime irrespective of settlement size.
Detailed Insights
The Reserve Bank of India has issued a refreshed set of directions designed to bring greater clarity and responsibility to the way Asset Reconstruction Companies resolve borrower claims. Central to these reforms is the requirement that each ARC formulate a comprehensive policy, endorsed by its Board, that delineates who qualifies for a one‑time settlement, the permissible haircut based on the borrower’s exposure bucket, and the approach used to calculate the recoverable value of pledged securities.
When a borrower’s outstanding dues exceed ₹1 crore, the settlement cannot be finalized without the input of an Independent Advisory Committee (IAC). The IAC—composed of professionals with proven expertise in finance, law or technical fields—will examine the debtor’s current financial health, projected cash‑flows and the likelihood of successful recovery before issuing its recommendation.
The Board of Directors, which must include a minimum of two independent directors, is then required to review the IAC’s findings, weigh alternative recovery mechanisms, and arrive at a decision that is fully justified in the official meeting minutes. For lower‑value accounts (₹1 crore or less), the ARC may settle based on the pre‑defined board policy, yet any staff involved in the original asset purchase is barred from participating in the settlement’s approval to guard against conflicts of interest. Moreover, the Board must evaluate quarterly trend reports that capture the performance and timelines of these smaller recoveries.
Reporting obligations have also been amplified. Every quarter, ARCs must submit a detailed account of resolved cases, highlighting the number and value of compromised accounts, categorising instances of fraud or wilful default, and outlining the observed recovery periods. Importantly, settlements involving wilful defaulters or fraudulent borrowers will be subjected to the same stringent procedures as high‑value cases, ensuring uniformity and preventing any soft‑selling of legal liabilities.
These directives are effective immediately, compelling ARCs to align their operations with the heightened standards and thereby safeguard borrower interests while reinforcing the integrity of the financial restructuring ecosystem.
Key Concepts
- Board‑Approved Settlement Policy: A formal document, ratified by an ARC’s Board, that sets out eligibility, exposure‑based concessions and valuation methodology for borrower settlements.
- Independent Advisory Committee (IAC): A panel of technical, financial or legal experts tasked with scrutinising high‑value borrower settlements (above ₹1 crore) and providing recommendations.
- Wilful Defaulter: A borrower who deliberately defaults on obligations, often involving fraud, and is treated under the same strict settlement rules regardless of the settlement amount.
- Conflict‑of‑Interest Safeguard: A rule barring personnel who acquired the financial asset from approving its settlement, thereby ensuring impartial decision‑making.
- Quarterly Settlement Report: A periodic filing by ARCs detailing trends, fraud classifications, and recovery timelines for settled accounts.