RBI issues master direction for securitisation of standard assets, loan transfer
The Reserve Bank of India (RBI) on Friday issued a separate master direction on the transfer of loan exposures and securitisation of standard assets, according to a report by Livemint. The directions came after taking into account the public comments on draft rules which were issued on June 8 last year. The RBI said in a statement that it has been observing the complicated and opaque securitisation structures which could be undesirable from the point of view of financial stability.
"Prudentially structured securitisation transactions can be an important facilitator in a well-functioning financial market in that it improves risk distribution and liquidity of lenders in originating fresh loan exposures," the RBI statement read.
The master direction will apply to all scheduled commercial banks in the country. However, regional rural banks, small finance banks and Non-Banking Financial Companies (NBFCs) and all-India term financial institutions will be excluded, the Livemint report added.
The central bank has also specified the Minimum Retention Requirement (MRR) for different classes of assets. For underlying loans with an original maturity of 24 months or lesser, the MMR will be 5 per cent of the book value of the loans being scrutinised.
Those loans having an original maturity of over 24 months will have an MMR of 10 per cent.
The RBI stated on Friday that in the case of residential mortgage-backed securities, the MRR for the originator shall be 5 per cent of the book value of the loans being securitised, irrespective of the original maturity. With regard to the master direction issued for the transfer of loan exposures, the RBI said the provisions of this direction will be applicable to banks, all NBFCs, including housing finance companies, National Bank for Agriculture and Rural Development (Nabard), NHB, EXIM Bank, and Small Industries Development Bank of India (Sidbi).
Loan transfers are resorted to by lending institutions for various reasons, ranging from liquidity management, rebalancing their exposures or strategic sales, the RBI said, adding, a robust secondary market in loans will help in creating additional avenues for raising liquidity.
“The lenders must put in place a comprehensive Board approved policy for transfer and acquisition of loan exposures under these guidelines,” Friday's statement read.
The master direction states that a "loan transfer should result in immediate separation of the transferor from the risks and rewards associated with loans to the extent that the economic interest has been transferred".
It is important to note that the transferor is the entity that transfers the economic interest in a loan exposure, and the transferee is the one to which the economic interest in a loan exposure is transferred. In case of any retained economic interest in 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 the transferee(s), the RBI statement added.
Also, a transferor "cannot re-acquire" a loan exposure, either fully or partially, which has been transferred by the entity previously, except as a part of a resolution plan.
(With agency inputs)