The RBI has effected major changes to the norms governing the transfer of bad loans and standard assets by lenders.
On Friday, the central bank issued Master Circulars on ‘Transfer of Loan Exposure’ and ‘Securitisation of Standard Assets’ to bring in transparency in the process and to improve liquidity in the system, besides corporate governance.
It has made it mandatory for lenders to put in place a comprehensive board-approved policy for transfer and acquisition of loan exposures under these guidelines.
“These guidelines must 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 and periodic board-level oversight,” the RBI said in a notification.
“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,” it added.
As per the Master Circular, loan transfers should result in transfer of economic interest without being accompanied by any change in underlying terms and conditions of the loan contract usually.
“In all cases, if there are any modifications to terms and conditions of the loan contract during and after transfer (eg. in take-out financing), the same shall be evaluated against the definition of ‘restructuring’ provided…”
It said lenders regardless of whether they are transferors or otherwise, should not offer credit enhancements or liquidity facilities in any form in the case of loan transfers.
As per the new rules 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.
“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,” the circular said.
Lenders have been allowed to transfer their bad loans to Asset Reconstruction Companies (ARCs) and now they can shift the responsibility of reporting, monitoring and filing of complains with law enforcement agencies and proceeding related to bad loans to the ARCs.
In the Master Circular on Securitisation of Standard Assets, the RBI has has allowed lenders to provide supporting facilities such as credit enhancement facilities, liquidity facilities, underwriting facilities and servicing facilities.
“Apart from lenders, since such facilities may also be provided by entities that are not lenders, entities providing such facilities are generally referred to in these directions as ‘facility providers.’ Such facility provider(s) must be regulated by at least one financial sector regulator,” the circular said.
“Provision of the facility should be structured in a manner to keep it distinct from other facilities and documented separately from any other facility provided by the facility provider,” the circular said.
“The nature, purpose, extent of the facility and all required standards of performance should be clearly specified in a written agreement to be executed at the time of originating the transaction and disclosed in the offer document,” it added.
Lenders have been asked that the facility is provided on an ‘arm’s length basis’ on market terms and conditions, and subjected to the facility provider’s normal credit approval and review process.
The directions have come into immediate effect. It is believed that the measures can lead to improvement in the liquidity of lenders and help them to rebalance their exposures.