The Reserve Bank of India (RBI) has eased guidelines for asset reconstruction companies (ARCs) to settle dues with defaulters based on the realisable value of assets.

For bad loans of up to Rs 1 crore, ARCs can process settlements based on criteria defined in the board-approved policy. There is no requirement of an independent advisory committee to examine such proposals, as was the practice earlier.

 However, officials involved in acquiring the bad financial asset cannot be part of the approval of the settlement of the same loan to prevent conflicts of interest. The board must also review quarterly reports detailing trends and recovery timelines for these accounts.

In case of loans above Rs 1 crore, either the board or a committee of the board can take a call, RBI said on Monday. Earlier, this power was vested only with the board.

The relaxations in the revised circular is timely as it allows for quicker resolution of small loans. This is at a time when ARCs are seeing a jump in retail and microfinance bad loans in their catchment area for over a year. Besides, settlements come at a lower cost compared to processes involving sale of assets and restructuring which lead to long-drawn legal processes.

Banks and non-banking financial companies (NBFCs) have been increasingly putting their unsecured retail loans up for sale to the ARCs. For the big-ticket bad loans, lenders are finding NCLT (National Company Law Tribunal) or the NARCL (National Asset Reconstruction Company Ltd) as the preferred resolution route. For stressed microloans, lenders like IndusInd Bank, Ujjivan Small Finance Bank and Utkarsh Small Finance Bank are tapping ARCs.

The settlement route allows lenders or ARCs to resolve bad debt by closing the loan account against a lump-sum payment or in parts.

Under the old October 2022 RBI circular, the settlement of bad loans of different sizes was not available. Also, the approval process for settlement of loans with the borrower was different as ARCs would require the proposal to be looked into by an independent advisory committee comprising professionals with technical, finance or legal background. This would then go to the ARC’s board, which included two independent directors. The board had to weigh that a settlement is the best option available and give its approval.

The revised guidelines come into effect immediately.