RBI Alert: RBI changes loan transfer rules; Issues Master Direction for Banks, NBFCs
The Reserve Bank on Friday issued a master directive on loan transfers, requiring banks and other lending institutions to have a comprehensive board-approved policy for such transactions. Credit transfers are resorted to by lending institutions for a variety of reasons, including managing liquidity, rebalancing their risk or strategic sale.
Also, a strong secondary market in loans will help create additional avenues to increase liquidity, the RBI said.
The provisions of the Direction are applicable to banks, all Non-Banking Finance Companies (NBFCs), including Housing Finance Companies (HFCs), NABARD, NHB, EXIM Bank and SIDBI.
The Master Direction has also prescribed minimum holding period for various categories of loans after which they will become eligible for transfer.
“Lenders should formulate a comprehensive board-approved policy for transfer and acquisition of credit exposures under these guidelines.
The Master Direction states, “These guidelines… lay down minimum quantitative and qualitative standards relating to due diligence, evaluation, IT systems required for data capture, storage and management, risk management, periodic board level monitoring, etc. should do.”
The draft guidelines on the Reserve Bank of India (Transfer of Credit Exposure) Directions, 2021 were released for public comments in June last year.
The final instructions issued on Friday have been prepared keeping in view, inter alia, the comments received. RBI said that this directive has come into force with immediate effect.
As per the directive, “a credit transfer shall result in the transferor being immediately separated from the risks and rewards associated with the loan, to the extent that the economic interest has been transferred”.
In case of any retained pecuniary interest in risk by the transferor, the credit transfer agreement must specify the distribution of principal and interest income from the transferred loan between the transferor and the transferee(s).
‘Transfer’ means the entity that transfers the pecuniary interest in the credit exposure, whereas ‘transfer’ refers to the entity to whom the pecuniary interest in the credit exposure is transferred.
It further stated that a transferor cannot “recover” a credit risk, either wholly or in part, which was previously transferred by the entity, other than as a part of a resolution plan.
In addition, “the transferee(s) must have the right to transfer or otherwise settle debts free of any restrictive condition, to the extent of economic interest transferred to them”.
Master Disha also provides a procedure for transfer of loans which are not in default.
Meanwhile, RBI also issued a Master Direction on Securitization of Standard Assets to facilitate their re-packaging into traditional securities with different risk profiles.
Noting that complex and opaque securitization structures may be undesirable from the point of view of financial stability, the RBI said, “A judiciously structured securitization transaction can be an important facilitator in a well-functioning financial market in which it is risk distribution.” and improves the liquidity of lenders in the generation of new credit exposures”.
In its ‘Master Direction – Reserve Bank of India (Securitization of Standard Assets) Directions, 2021’, the central bank has specified the Minimum Retention Requirement (MRR) for various classes of assets.
For underlying loans with an original maturity of 24 months or less, the MRR will be 5 per cent of the book value of the loans being securitized. For loans with an original maturity of more than 24 months, it will be 10 per cent.
In the case of residential mortgage-backed securities, the MRR for the promoter will be 5 percent of the book value of the loans being securitized, irrespective of the original maturity.
(with PTI inputs)
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