The Reserve Bank on Friday issued a Master Directorate for Credit Transfers, which requires banks and other credit institutions to have a comprehensive policy approved by the Board for such transactions.
Credit institutions use credit transfers for a variety of reasons, from managing liquidity to rebalancing their exposures to strategic sales. In addition, a strong secondary market for loans will help create additional opportunities to increase liquidity, the RBI said.
The provisions of the Directive apply to banks, all non-bank finance companies (NBFCs), including home finance companies (HFCs), NABARD, NHB, EXIM Bank and SIDBI.
In addition, the Master Directorate has established a minimum holding period for various categories of credit, after which they are transferable.
“Lenders must have a comprehensive policy approved by the Board for the transfer and acquisition of credit exposures in accordance with these guidelines.
“These guidelines must … establish the minimum quantitative and qualitative standards in terms of due diligence, evaluation, computer systems required for the collection, storage and management of data, risk management, periodic supervision at the board level, etc.” said the Master Directorate. 4,444 draft guidelines on the Reserve Bank of India (Transfer of Credit Exposures) Guidelines, 2021, were released for public comment last June.
The final directive issued on Friday was created to take into account, among other things, the comments received. The address, the RBI said, took effect immediately.
According to the instruction, “the transfer of a loan must result in an immediate separation of the assignor from the risks and opportunities associated with the loans, to the extent that the economic interests have been transferred.”
In the event that the transferor’s economic interest is retained in the claim, the loan transfer agreement must stipulate the distribution of principal and interest income on the transferred loan between the transferor and the recipient (s), added.
“Assignor” means the entity that transfers the beneficial interest in a credit exposure, while “Assignee” means the entity to which the beneficial interest in a credit exposure is transferred.
It also establishes that a transferor cannot “reacquire” any credit exposure previously transferred by the company, totally or partially, except as part of a liquidation plan.
Furthermore, “the acquirers must have an unconditional right to transfer or dispose of the loans without restrictive conditions to the extent of the economic interest transferred to them.”
The Master’s Directorate also establishes a procedure for the transfer of credits that are not in arrears.
Meanwhile, the RBI has also issued a Master Directorate for the securitization of standard assets to facilitate their repackaging into transferable securities with different risk profiles.
The RBI noted that complicated and opaque securitization structures could be undesirable from a financial stability perspective and said: “new credit exposures”.
In its “Master Address – Reserve Bank of India Addresses (Standard Asset Securitization), 2021”, the central bank has set minimum retention requirement (MRR) for various asset classes.
For underlying loans with an original term of no more than 24 months, the MRR is 5 percent of the book value of the loans to be securitized. For loans with an original term of more than 24 months, it is 10 percent.
For residential property-backed securities, the MRR for the originator is 5% of the book value of the securitized loans, regardless of the original term.
