RBI to ARCs: Settlements only after exhausting all options, prioritise lump sum payments

The Reserve Bank of India (RBI) on Monday revised guidelines for Asset Reconstruction Companies (ARCs), mandating that settlements with borrowers should be pursued only after exhausting all avenues for recovery.

Every ARC should frame a board-approved policy for the settlement of dues payable by the borrowers, according to an RBI circular.

The policy should address the eligibility criteria for one-time settlements, permissible sacrifices on exposures, and methods for determining the realizable value of securities.

“Settlement with borrowers shall be done only after all possible ways to recover the dues have been examined, and settlement is considered the best option available,” the RBI said.

The central bank stressed that settlements should preferably involve lump sum payments. In cases of staggered payments, the proposals should be in line with and supported by an acceptable business plan (where applicable), projected earnings and cash flows of the borrower.

For cases involving dues exceeding ₹1 crore, an Independent Advisory Committee (IAC) comprising professionals with technical, financial, or legal expertise must review the proposals and provide recommendations. The ARC’s Board of Directors, including at least two independent directors, must then deliberate on the recommendations before approving any settlement.

For dues up to ₹1 crore, ARCs must adhere to criteria defined in their Board-approved policies, with periodic reports submitted to the Board for oversight.

The revised guidelines also specify that settlements with borrowers categorised as wilful defaulters or frauds can be undertaken without prejudice to ongoing criminal proceedings, provided they follow the prescribed approval process.

The updated framework also mandates ARCs to obtain consent decrees for settlements under judicial proceedings and maintain detailed records of settlement trends, including accounts classified as fraud or wilful default.