RBI changes Rules for Loan Transfer for Banks, NBFCs

The Reserve Bank issued master direction on transfer of loan on September 24, 2021. The new mandate necessitates the requirement for banks and other lending entities to put in place a comprehensive and board approved policy for loan transfer transactions. As per the RBI, the provisions of this direction on rules for loan transfer shall be applicable from the date of issue, i.e., 24 September 2021. It may be noted that these provisions shall apply for banks as well as NBFCs.

The need for new RBI mandate: Rules for loan transfer

The transfer of loan is done by lending institutions for different reasons such as for liquidity management, rebalancing their exposures or strategic sales. A robust secondary market in loans can help in management of credit exposures by lending institutions and create additional avenues for enhancing liquidity. Hence the RBI stated it was necessary to lay down comprehensive regulatory guidelines governing transfer of loans.

Key points of the RBI’s Master Direction (Rules for Loan Transfer)

• As per the Reserve Bank, the lenders are required to put in place a comprehensive board approved policy for the transfer and loan exposures acquisition under these guidelines. The guidelines should provide for the minimum quantitative and qualitative standards pertaining to due diligence, valuation, requisite IT systems for capturing, storing and managing data, risk management, periodic board level oversight etc.
• Further, the policy should also ensure independence of functioning and reporting responsibilities of units and personnel involved in the transfer/acquisition of loans from personnel involved in originating loans. All transactions are required to meet the requirements as provided in the policy.
• The draft guidelines on RBI’s Transfer of Loan Exposures Directions were released for public comments in the month of June 2020. The final direction issued on Friday was prepared to take into consideration inter alia the comments received. The RBI said that the direction came into effect immediately.
• The RBI Master Direction specified that the transfer of loan must result in immediate separation of the transferor from risks and rewards associated with the loans to the extent that economic interest is transferred. If there is any retained economic interest in the exposure by the transferor, then, in that case, the loan transfer agreement must specify the distribution of the principal and interest income from the loan transferred between the transferor and the transferee.
• The direction elaborated that the transferor (the party who did the transfer of the economic interests) can’t re-acquire loan exposure, fully or partially, if it was transferred by the entity earlier. It will be possible only if it was part of the resolution plan. The Reserve Bank stated that a transferor can’t re-acquire loan exposure, fully or partially, if it was transferred by the entity earlier, except as part of the resolution plan under RBI (Prudential Framework for resolution of Stressed Assets^[1]) Directions, 2019 or as part of the resolution plan approved under the IBC 2016.
• The RBI further specified that the transferee must have unfettered rights to transfer or dispose of loans free of any restraining condition. It shall apply to the extent of economic interest transferred to them. Moreover, the transferor will not have any obligation to re-acquire or fund re-payment of loans or any part thereof. They shall also not have any obligation to substitute loans held by the transferee or provide additional loans to them at any instance except those that arise from breach of warranties made at the time of transfer. The master direction also lays down the procedure for transfer of loans that are not in default.

Conclusion

Parallelly the Reserve Bank issued another Master Direction on RBI (Securitisation of Standard Assets) Directions 2021. Here the Minimum Retention Requirement for different classes of assets was specified. It is believed that these measures (changes in rules for loan transfer) can bring improvement in the liquidity of lenders and help them in rebalancing their exposures. You may refer to the RBI Master Direction on transfer of loan exposures directions 2021 attached with this article.