RBI revises guidelines on settlement of dues of borrowers by Asset Reconstruction Companies (ARC)

The Reserve Bank of India (RBI) has revised the guidelines for the settlement of dues by borrowers of Asset Reconstruction Companies (ARCs). These updated directions aim to streamline the resolution of non-performing assets (NPAs), promote transparency, and improve the recovery process for distressed assets.

RBI revises guidelines on settlement of dues of borrowers by Asset Reconstruction Companies (ARC).
Guidelines are issued in exercise of the powers conferred by Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

Overview of the SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, is a landmark legislation that enables banks and financial institutions to recover non-performing assets without the need for court intervention. The Act empowers lenders to:

• Take possession of secured assets.
• Sell or lease these assets to recover dues.
• Expedite the recovery process efficiently and effectively.

What Are Asset Reconstruction Companies (ARCs)?

Asset Reconstruction Companies play a pivotal role in resolving bad loans and cleaning up the balance sheets of banks and financial institutions.

1. Functions of ARCs:
   • ARCs acquire and resolve non-performing assets or bad loans from banks.
   • They manage and rehabilitate distressed assets to recover value.
   • Their operations aim to improve the financial health of lending institutions.
2. Registration and Regulation:
   • ARCs are registered with the RBI under the SARFAESI Act, 2002, ensuring compliance with the prescribed legal and operational framework.

Key Highlights of the Revised Guidelines

1. One-Time Settlement Policies:
   • ARCs are now required to frame Board-approved policies for one-time settlements. These policies must cover:
     • Eligibility criteria for settlements.
     • Methodologies to determine the realizable value of securities.
2. Independent Advisory Committees (IACs):
   • For accounts with outstanding dues exceeding ₹1 crore:
     • ARCs must consult an Independent Advisory Committee (IAC), comprising experts from financial, legal, and technical domains.
     • Recommendations from the IAC will be reviewed by the Board of Directors, which should include at least two independent directors.
     • The Board must evaluate alternative recovery options before finalizing settlements.
3. Simplified Processes for Small Accounts:
   • For accounts with dues of ₹1 crore or below:
     • Settlement decisions can now be approved by a competent authority established under a Board-approved policy.
     • This ensures quicker resolutions for smaller accounts.
4. Conflict of Interest Prevention:
   • Officials involved in the acquisition of financial assets are prohibited from participating in the settlement approval process. This measure ensures unbiased decision-making.
5. Mandatory Reporting:
   • ARCs must submit quarterly reports to their Board detailing:
     • Resolution trends.
     • Classifications of fraud or wilful default.
     • Recovery timelines.

Importance of ARCs in the Financial Ecosystem

1. Resolution of Bad Loans:
   ARCs enable banks to focus on core operations by managing and resolving NPAs.
2. Development of Distressed Asset Markets:
   ARCs create a structured market for distressed assets, promoting transparency and investment opportunities.
3. Liquidity Injection:
   By resolving bad loans, ARCs inject liquidity into the banking system, improving financial stability.
4. Enhanced Bank Valuations:
   Efficient asset resolution by ARCs helps banks improve their valuations, making it easier to raise capital and attract investors.

Conclusion

The RBI’s revised guidelines for ARCs reflect its commitment to strengthening India’s financial system by improving the resolution framework for distressed assets. These measures are expected to enhance transparency, accountability, and efficiency in ARC operations, ultimately benefiting borrowers, banks, and the broader financial sector.

With the SARFAESI Act as the backbone of these reforms, ARCs continue to play a crucial role in enabling the recovery and resolution of bad loans, contributing to the stability and growth of the Indian economy