The Reserve Bank of India (RBI) issued a Master Direction on loan transfer on Friday. This new mandate put into play the requirement of banks and other lending entities to implement a comprehensive and board-approved policy for these transactions. Loan transfers are typically done by banks and other financial entities for the purposes of managing liquidity, rebalancing their exposures or strategic sales to name a few. As per the RBI mandate, the provisions of the direction are applicable effective from the date of issue, i.e., September 24, 2021, and will apply for all banks as well as non-banking financial companies (NBFCs). This includes the likes of housing finance companies.
Mentioning the institutions that this would apply to, the RBI direction said, “All Scheduled Commercial Banks (including Small Finance Banks but excluding Regional Rural Banks); All All-India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI); All Non-Banking Financial Companies (NBFCs) including Housing Finance Companies (HFCs).”
The Master Direction also prescribed a minimum holding period for different categories of loans, only after which, they would become eligible to undergo a transfer.
“The lenders must put in place a comprehensive Board approved policy for transfer and acquisition of loan exposures under these guidelines. These guidelines must, inter alia, lay down the minimum quantitative and qualitative standards relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management, periodic Board level oversight, etc. Further, the policy must also ensure independence of functioning and reporting responsibilities of the units and personnel involved in transfer/acquisition of loans from that of personnel involved in originating the loans. All transactions must meet the requirements as detailed in the policy,” said the RBI in the Master Direction.
It should be noted that a draft of the guidelines on RBI’s ‘Transfer of Loan Exposures’ Directions was released for public comments in June of 2020. The latest that was issued yesterday, is but the final direction or finalised iteration after having taken into account inter alia the comments that were received on the matter. The RBI stated that this direction would come into effect immediately.
The Master Direction mentioned, “A loan transfer should result in immediate separation of the transferor from the risks and rewards associated with loans to the extent that the economic interest has been transferred. In case of any retained economic interest in the exposure by the transferor, the loan transfer agreement should clearly specify the distribution of the principal and interest income from the transferred loan between the transferor and the transferee(s)”
The direction elaborated on the fact that the transferor, the party who did the transfer of the concerned economic interests, cannot re-acquire a loan exposure, fully or partially, if it was transferred by the entity previously. It would only be possible if it were part of a resolution plan.
The RBI said, “A transferor cannot re-acquire a loan exposure, either fully or partially, that had been transferred by the entity previously, except as a part of a resolution plan under the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 or as part of a resolution plan approved under the Insolvency and Bankruptcy Code, 2016.”
It was further explained that the transferee should have ‘unfettered’ rights to transfer or otherwise dispose of the loans free of any restraining condition. This would apply to the extent of economic interest transferred to them. Additionally, the transferor would have no obligation to re-acquire or fund the re-payment of the loans or any part of it. They also have no obligation to substitute loans held by the transferee or provide additional loans to them at any time except those that arise from a breach of warranties made at the time of the transfer.
Parallelly, the RBI also issued another document - ‘Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021’. In this, the apex bank specified the Minimum Retention Requirement (MRR) for different classes of assets. They came into immediate effect, essentially replacing the pre-existing instructions on the matter of securitisation of standard assets.