This has made it mandatory for lenders to formulate a comprehensive board-approved policy for transfer and acquisition of credit exposures under these guidelines.
RBI has made major changes in the norms governing transfer of bad loans and standard assets by lenders.
The central bank on Friday issued master circulars on ‘transfer of loan exposures’ and ‘securitization of standard assets’ to bring transparency in the process and improve liquidity in the system, apart from corporate governance.
This has made it mandatory for lenders to formulate a comprehensive board-approved policy for transfer and acquisition of credit exposures under these guidelines.
“These guidelines should prescribe minimum quantitative and qualitative standards relating to IT systems required for due diligence, evaluation, data capture, storage and management, risk management and periodic board level monitoring,” RBI said in a notification.
“In addition, the policy should also ensure independence of functioning and reporting responsibilities of the units and personnel involved in transfer/acquisition of loans from personnel involved in origination of loans.”
As per the Master Circular, transfer of loan should generally result in transfer of pecuniary interest without any change in the underlying terms and conditions of the loan contract.
“In all cases, if there is an amendment to the terms and conditions of the loan contract during and after the transfer (for example in take-out financing), the same shall be assessed as defined in ‘restructuring’…”
It said that the lenders, whether transferor or otherwise, should not offer credit enhancement or liquidity facilities in any form in case of loan transfers.
As per the new rules, except as part of a resolution plan under the Reserve Bank of India (Prudential Framework for Stressed Resolution), a transferor cannot recoup wholly or partly a credit risk, which was previously assigned to the entity. was transferred by. Assets) Directions, 2019.
“Consequent to the transfer of credit, the transferor should be immediately absolved of the risks and rewards associated with the loan, to the extent that the pecuniary interest has been transferred,” the circular said.
Lenders have been allowed to transfer their bad loans to Asset Reconstruction Companies (ARCs) and are now responsible for filing complaints with law enforcement agencies and reporting, monitoring and filing complaints with ARCs related to bad loans. can do.
In the Master Circular on Securitization of Standard Assets, RBI has permitted lenders to provide ancillary facilities such as credit enhancement facilities, liquidity facilities, underwriting facilities and servicing facilities.
“In addition to the lenders, since such facilities may also be provided by entities that are not lenders, the entities providing such facilities are generally referred to in these directions as ‘facilitators’. Such facilitators (s) to be regulated by at least one financial sector regulator,” the circular stated.
“The provision of the facility shall be structured to be distinct from other facilities and shall be documented separately from any other facility provided by the facility provider,” the circular said.
“The nature, purpose, extent of the facility and all necessary parameters of performance should be clearly specified in a written agreement which should be executed at the time of inception of the transaction and disclosed in the offer document,” it added.
Lenders have been told that the facility is provided based on market terms and conditions, and is subject to the facilitator’s normal credit approval and review process.
The instructions have come into force with immediate effect. It is believed that the measures could improve the liquidity of lenders and help them rebalance their exposure.
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