Settlement Of Small Loans Made Easier For Asset Reconstruction Companies

1.

Framing Board-approved policy

ARCs were required to frame a Board-approved policy with respect to settlement of dues payable by the borrowers based on the framework stated therein. However, detailed directions as to what should the said policy entail was not provided.

The New Guidelines provide specific guidance mandating that the policies shall include aspects such as cut-off date for one-time settlement eligibility, permissible sacrifice for various categories of exposures while arriving at the settlement amount and methodology for arriving at the realisable value of the security.

2.

Settlement as the last resort

Settlement with the borrower should be done only after all possible steps to recover the dues have been taken and there are no further prospects of recovering the debt.

ARCs are required to examine all potential recovery options and choose settlement only if it is deemed the most suitable course of action. The requirement for ARCs to exhaust all possible recovery steps before pursuing settlement with the borrowers has been removed.

3.

Lump-sum payment terms

Settlement amount has to preferably be paid in lump-sum. However, where the borrower was unable to pay the entire amount in lump-sum, the directions required that the Independent Advisory Committee (IAC) would have to make specific recommendations about minimum upfront lump sum payment and maximum repayment period.

The revised framework also stipulates that the settlement amount should preferably be paid in a lump sum. However, in cases where the settlement does not envisage payment of the entire amount agreed upon in one instalment, the proposals must align with and be supported by an acceptable business plan (where applicable), projected earnings and cash flows of the borrower. The requirement of recommendation of IAC in respect of proposals not envisaging payment in one lump sum has been done away with.

4.

Settlement of dues

Settlement of dues with the borrower could be done only after the proposal was examined by the IAC, who after assessing the financial position of the borrower, the time frame available for the recovery of the dues, projected earnings as well as cash flows of the borrower and other relevant aspects, would give its recommendations to the ARC regarding the settlement. Further, the Board of Directors, including at least two independent directors, were mandated to review the recommendations of the IAC and consider all the available options before deciding if settlement would be the appropriate course of action. The decision of the Board of Directors, along with detailed rationale, had to be specifically recorded in the minutes of the Board meeting.

The framework governing the settlement of dues payable by borrowers has undergone significant change. The New Guidelines categorize borrowers into two groups: those with an aggregate outstanding principal exceeding Rs.1 crore at the time of acquisition by the ARC and those with an aggregate outstanding principal of Rs.1 crore or below.

For borrowers with dues exceeding Rs.1 crore, the New Guidelines stipulate that settlements must adhere to a Board-approved policy and comply with certain conditions. These conditions remain consistent with the previous framework, requiring that proposals be evaluated by the IAC¹, which assesses the borrower's financial position, recovery timeframe, projected earnings, cash flows, and other relevant factors before making recommendations to the ARC. The Board of Directors, including at least two independent directors, must then deliberate on the IAC's recommendations, consider all available options, and record their decision and rationale in the minutes of the Board meeting.

Additionally, the New Guidelines introduce the option for a Committee of the Board², meeting prescribed criteria, to review the IAC's recommendations and make decisions on settlements, providing an alternative approach within the stipulated framework.

For borrowers with dues of Rs.1 crore or less, the New Guidelines mandate that settlements be conducted in accordance with the criteria outlined in the Board-approved policy, subject to the following specific conditions:

(i) Exclusion of certain officials: officials involved in the acquisition of the financial asset, either individually or as part of a committee, must not participate in processing or approving the settlement proposal for the same asset in any capacity.

(ii) Quarterly reporting: a quarterly report on the resolution of these accounts must be submitted to the Board or a committee of the Board.

(iii) Reporting Format: The Board shall establish a reporting format. The New Guidelines specify the minimum information required to be covered in the report. The reporting format shall provide for (i) trend in the number of accounts and amounts involved in compromise settlements (q-o-q and y-o-y) (ii) a detailed breakdown of such accounts classified as fraud or wilful default (as declared by banks and NBFCs); (iii) grouping of such accounts amount wise, acquisition and authority wise, business segment, or asset class wise; (iv) extent and timelines of recovery in such accounts.

5.

Settlement of dues payable by borrowers classified as fraud and wilful defaulters

Did not provide any guidelines for settling dues owed by borrowers classified as fraud or wilful defaulters.

Now the procedure outlined in paragraph 15.5, pertaining to the settlement of accounts with an aggregate outstanding principal exceeding Rs.1 crore at the time of acquisition by the ARC, will apply to such borrowers, regardless of the amount involved. Furthermore, ARCs may proceed with the settlement of dues in these cases without prejudice to any ongoing criminal proceedings against such borrowers. Thus, the benefit of a simplified framework applicable for Small Loans will not be available in case of fraud accounts.

6.

Judicial oversight for pending cases

Did not contain any requirement for obtaining judicial approval for settlement in ongoing recovery proceedings.

Now compromise settlements with borrowers shall be without prejudice to the provisions of any other law in force. Additionally, if ARCs have initiated recovery proceedings in a judicial forum and the matter is still pending, any settlement reached with the borrower must be subject to obtaining a consent decree from the relevant judicial authorities.