News and developments
RBI Reforms the Framework on Loan Sales
The Master Directions have replaced the existing instructions on the matter of sale / transfer of loan exposures. It also consolidates various instructions on transfer of loans and aligns the relevant provisions on the subject matter with the Insolvency and Bankruptcy Code, 2016 and the RBI (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 (“Prudential Framework”).
The Master Directions are applicable to all banks, non-banking financial companies (��NBFCs”) and financial institutions as specified thereunder. The Master Directions provide for the transfer of 2 categories of loans - standard loans and stressed loans.
[1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12166
TRANSFER OF STANDARD LOANS:
Transfer of standard loans by way of assignment, novation and participation is expressly dealt under the Master Directions. Following are the key developments in case of transfer of standard loans:- Recognition of loan participation:
- Dispensation of Minimum Retention Requirement (“MRR”):
- Minimum Holding Period (“MHP”):
- Exception list:
- Representation & Warranties:
TRANSFER OF STRESSED LOANS:
Transfer of stressed loans by different modes is permitted except by way of loan participation. Following are the key developments in case of transfer of stressed loans:- Bilateral Negotiations:
- Swiss Challenge:
- In case of bilateral negotiations, if the aggregate exposure of the lenders towards a particular borrower whose exposure is being transferred is more than INR 100 crores; and
- Transfer pursuant to a resolution plan approved in accordance with the terms of the Prudential Framework (irrespective of the monetary threshold).
- Corporates permitted to take on loan exposures:
- MHP for stressed loans:
- Stressed assets transferred to ARCs:
Key Takeaway:
In addition to combining the various requirements for loan sales into one comprehensive framework, the RBI has now in a pivotal move, through the Master Directions, turned its hand to recognising loan participation transactions, sale of stressed assets to corporate entities and transfer of fraudulent accounts to ARCs. The nascent stage of these concepts in the loan sales framework means that clarity from the RBI on certain aspects which are open to more than one interpretation and actual execution of the Master Directions is crucial to determine the success of the Master Directions. All things considered, such well-founded regulatory framework governing the sale of bank loan exposures will encourage market participants, provide comfort to the lenders and consequently, boost secondary market for bank loans.Authors
Saurabh Sharma Partner, Juris Corp Email: [email protected] Rupul Jhanjee Associate Partner, Juris Corp Email: [email protected] Divya Dhage Associate, Juris Corp Email: [email protected][1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12166