Asset Reconstruction Companies Seek Simplification of Settlement Guidelines from RBI

Key Takeaways:

• Introduction of a unified framework by RBI on June 8, 2023, for compromise settlements and technical write-offs for all entities.
• Requirement for all settlement proposals to be vetted by an Independent Advisory Committee (IAC) with professionals having technical, finance, or legal backgrounds, and subsequent approval at the board level of a bank.
• Challenges faced by ARCs in implementing the settlement guidelines, particularly in handling a large number of cases, especially those involving retail non-performing assets (NPAs).
• Request by ARCs for uniform treatment of settlement guidelines and a more practical approach to handling settlement cases, including the delegation of powers to various functionaries.

Request for Simplification of Settlement Process by ARCs to RBI

The Asset Reconstruction Companies (ARCs) have approached the Reserve Bank of India (RBI) to review the settlement guidelines issued in October 2022, aiming to ensure further simplification without compromising the objective of a mechanism harmonious with the processes governing such transactions for other regulated entities. The RBI had introduced a unified framework on June 8, 2023, for compromise settlements and technical write-offs for all entities, including banks, NBFCs, HFCs, AIFIs, etc.

Key Points from the Request:

1. Unified Framework Introduction: The RBI introduced a unified framework on June 8, 2023, for compromise settlements and technical write-offs for all entities, such as banks, NBFCs, HFCs, AIFIs, etc.

2. Settlement Proposal Vetting: The October 2022 circular requires all settlement proposals to be vetted by an Independent Advisory Committee (IAC) with professionals having technical, finance, or legal backgrounds. Subsequently, all proposals have to be approved at the board level of a bank.

3. Requirement for Settlements: Settlements with borrowers are only allowed after all possible steps to recover dues have been taken, and there’s no more chance of recovering the debt.

4. Request for Uniform Treatment: The ARC association has requested uniformity in the treatment of settlement guidelines, considering that ARCs acquire debts from these entities.

5. Challenges Faced by ARCs: ARCs are facing difficulty in implementing the settlement guidelines, especially large ARCs with retail NPAs, which have settled thousands of cases after the introduction of revised settlement guidelines. The process of taking these cases to the board and getting them vetted by IAC and approved by the board is deemed nearly impossible due to the volume of cases.

6. Practical View Requested: ARCs have been requesting the regulator to take a practical view and dispense with rigid stipulations like referring each case to IAC and then to the Board. They propose that ARC Boards may be authorized, as was the position earlier to October 2022, to delegate powers to various functionaries, especially in the case of retail loans where on-the-spot decisions have to be taken.

The request by ARCs to simplify the settlement process reflects the challenges faced by these entities in adhering to the current guidelines and the need for a more practical approach to handling settlement cases.

FAQ

Q1: Why have ARCs approached the RBI to review the settlement guidelines?

A1: ARCs have approached the RBI to review the settlement guidelines to ensure further simplification without compromising the objective of the mechanism, considering the challenges faced in implementing the current guidelines.

Q2: What challenges are ARCs facing in implementing the settlement guidelines?

A2: ARCs are facing difficulties, especially in handling a large volume of cases, particularly those involving retail non-performing assets (NPAs).