The Federal Reserve Bank on Friday issued Master Direction on loan transfer, requiring banks and other lending institutions to possess a comprehensive board-approved policy for such transactions.
Loan transfers are resorted to by lending institutions for various reasons, starting from liquidity management, rebalancing their exposures or strategic sales.
Also, a strong secondary market in loans will help in creating additional avenues for raising 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 a minimum holding period for various categories of loans after which they shall become eligible for transfer.
“The lenders must put in situ 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 concerning due diligence, valuation, requisite IT systems for capture, storage and management of knowledge , risk management, periodic Board level oversight, etc,” said the Master Direction.
Draft guidelines on Federal Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, were released for public comments in June last year.
The final direction issued on Friday has been prepared to require under consideration inter alia the comments received. The direction, the RBI said came into effect immediately.
As per the direction, “a loan transfer should end in immediate separation of the transferor from the risks and rewards related to loans to the extent that the economic interest has been transferred”.
In case of any retained economic interest within the exposure by the transferor, the loan transfer agreement should specify the distribution of the principal and interest income from the transferred loan between the transferor and therefore the transferee(s), it added.
‘Transferor’ means the entity which transfers the economic interest during a loan exposure, while ‘transferee’ refers to the entity to which the economic interest during a loan exposure is transferred.
It further said a transferor “cannot re-acquire” a loan exposure, either fully or partially, that had been transferred by the entity previously, except as a neighborhood of a resolution plan.
Further, “the transferee(s) should have the unfettered right to transfer or otherwise eliminate the loans freed from any restraining condition to the extent of economic interest transferred to them”.
The master direction also provides a procedure for the transfer of loans that aren’t in default.
Meanwhile, the RBI also issued Master Direction on the securitisation of ordinary assets to facilitate their repackaging into tradable securities with different risk profiles.
Observing that complicated and opaque securitisation structures might be undesirable from the purpose of view of monetary stability, the RBI said, “Prudentially structured securitisation transactions are often a crucial facilitator during a well-functioning financial market therein it improves risk distribution and liquidity of lenders in originating fresh loan exposures”.
In its ‘Master Direction – Federal Reserve Bank of India (Securitisation of ordinary Assets) Directions, 2021′, the financial institution has specified the Minimum Retention Requirement (MRR) for various classes of assets.
For underlying loans with an ingenious maturity of 24 months or less, the MRR shall be 5 per cent of the value of the loans being securitised. it’ll be 10 per cent for loans with an ingenious maturity of quite 24 months.
In the case of residential mortgage-backed securities, the MRR for the originator shall be 5 per cent of the value of the loans being securitised, regardless of the first maturity.