RBI moots comprehensive norms for sale of loans

The Reserve Bank of India (RBI) has proposed a comprehensive set of norms for sale of loans by banks which could be either standard or sub-standard. The move is aimed at building a robust secondary market for bank loans that could ensure proper price discovery and can be used as an indicator for impending stress, the central bank said.

At present, the guidelines for sale of loan exposures, both standard as well as stressed exposures, are spread across various circulars of the RBI.

Observing that loan sales are carried out by lenders for reasons ranging from strategic sales to rebalancing their exposures or as a means to achieve resolution of stressed assets by extinguishing the exposures, the RBI said, “A dynamic secondary market for bank loans will also ensure proper discovery of credit risk pricing associated with each exposure, and will be useful as a leading indicator for impending stress, if any, provided that the volumes are sufficiently large.”

These guidelines will be applicable to commercial banks, all financial institutions, non-banking finance companies and small finance banks.

The directions will be applicable to all loan sales, including sale of loans to special purpose entities for the purpose of securitisation, the RBI said.

“The price discovery process has been deregulated to be as per the lenders’ policy,” the draft norms said.

According to the draft framework, standard assets would be allowed to be sold by lenders through assignment, novation or a loan participation contract .

The stressed assets, however, would be allowed to be sold only through assignment or novation, the draft said adding, “stressed assets may be sold to any entity that is permitted to take on loan exposures by its statutory or regulatory framework”. It is also proposed to do away with the requirement of Minimum Retention Requirement (MRR) for sale of loans by lenders.

Comments have been invited from stakeholders on the draft framework by June 30.

The central bank has also proposed significant changes in securitisation norms which are aimed at development of a strong and robust market for such transactions.

The revision in guidelines is an attempt to align the regulatory framework with the Basel guidelines on securitisation that have come into force effective January 1, 2018, the RBI said.

Only transactions that result in multiple tranches of securities being issued reflecting different credit risks will be treated as securitisation transactions, and accordingly covered under these revised norms.

The norm has prescribed a special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations with clearly defined criteria and preferential capital treatment.

The definition of securitisation has been modified to allow single asset securitisations. Securitisation of exposures purchased from other lenders has been allowed, according to the revised guidelines.

“One of the key changes relates to differential treatment for Residential Mortgage Backed Securities (RMBS) compared to other securitisations in respect of prescriptions regarding minimum holding period (MHP), minimum retention requirements (MRR) and reset of credit enhancements,” the draft norms said.

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Printable version | May 6, 2021 9:35:45 PM |

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