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RBI Tightens Guidelines for ARCs: Focus on Recovery First
Context:
The Reserve Bank of India (RBI) has updated the guidelines for Asset Reconstruction Companies (ARCs) under the ‘Master Direction Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024‘, stipulating that settlements with borrowers can only occur after all recovery options have been exhausted.
About the Guidelines to ARCs
- Mandatory Board-Approved Policy:
- ARCs must have a policy approved by their board for settling borrower dues.
- Policy must include:
- Cut-off date for One-Time Settlement (OTS) eligibility.
- Permissible sacrifice for different categories of exposures.
- Methodology to calculate the realisable value of securities.
- Payment Terms:
- The settlement amount should preferably be paid in a lump sum.
- If not lump sum, proposals must be:
- Supported by an acceptable business plan.
- Backed by projected earnings and cash flows of the borrower.
- Threshold for Accounts: Special procedures for borrower accounts with an aggregate value of ₹1 crore or more.
About ARCs
- Role:
- Specialised financial institutions for managing and resolving stressed assets.
- Functionality:
- Acquire non-performing assets (NPAs) from banks and financial institutions.
- Recover dues through restructuring, settlement, or sale of underlying assets.
- Significance:
- Reduce NPAs in the banking sector.
- Facilitate credit flow by addressing stressed assets.
- Valuation Standards: Net Present Value (NPV) of settlement should generally not be less than the realisable value of securities.
About ‘Master Direction RBI (ARC) 2024’
- Comprehensive guidelines to govern the functioning of ARCs.
- Aims to enhance:
- Transparency in operations.
- Efficiency in asset resolution.
- Fair recovery practices.
Need for These Guidelines
- Safeguard Financial System:
- Prevent misuse of ARC mechanisms for undue gains.
- Strengthen accountability and due diligence.
- Enhance Recovery Mechanisms:
- Ensure that all recovery options are explored before settlements.
- Maximise realisation of securities’ value.
- Promote Transparency:
- Create a structured framework for settlements.
- Align ARC practices with global standards.
Impact of the Guidelines
- On ARCs:
- Stricter compliance requirements.
- Enhanced operational transparency and efficiency.
- On Borrowers:
- Discourages attempts to exploit settlement options prematurely.
- Ensures settlements are realistic and supported by financial viability.
- On Banking Sector:
- Improved NPA recovery rates.
- Strengthened confidence in ARC-led asset resolution mechanisms.
- On Overall Economy:
- Boosts financial system stability.
- Facilitates better allocation of resources by addressing stressed assets effectively.
