You are here: Home » Finance » News » Banks
Business Standard

RBI announces revised rules for securitisation of standard assets

The Reserve Bank on Friday issued Master Direction on loan transfer, requiring banks and other lending institutions to have a comprehensive board-approved policy for such transactions.

Topics
RBI | Securitisation | lending

Press Trust of India  |  Mumbai 

photo: Bloomberg
Loan transfers are resorted to by lending institutions for various reasons, ranging from liquidity management, rebalancing their exposures or strategic sales. (Photo: Bloomberg)

The Reserve Bank on Friday issued Master Direction on loan transfer, requiring and other institutions to have a comprehensive board-approved policy for such transactions.

Loan transfers are resorted to by institutions for various reasons, ranging from liquidity management, rebalancing their exposures or strategic sales. Also, a robust secondary market in will help in creating additional avenues for raising liquidity, the said.

The provisions of the direction are applicable to banks, all non-banking companies (NBFCs), including housing companies (HFCs), NABARD, NHB, EXIM Bank, and SIDBI.

The Master Direction has also prescribed a minimum holding period for different categories of after which they shall become eligible for transfer.

"The lenders must put in place 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 relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management, periodic Board level oversight, etc," said the Master Direction.

Draft guidelines on 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 take into account inter alia the comments received. The direction, the said came into effect immediately.

As per the direction, "a loan transfer should result in immediate separation of the transferor from the risks and rewards associated with to the extent that the economic interest has been 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), it added.

'Transferor' means the entity which transfers the economic interest in a loan exposure, while 'transferee' refers to the entity to which the economic interest in 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 part of a resolution plan.

Further, "the transferee(s) should have the unfettered right to transfer or otherwise dispose of the loans free of 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 are not in default.

Meanwhile, the also issued Master Direction on the of standard assets to facilitate their repackaging into tradable securities with different risk profiles.

Observing that complicated and opaque structures could be undesirable from the point of view of financial stability, the RBI said, "Prudentially structured 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".

In its 'Master Direction Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021', the central bank has specified the Minimum Retention Requirement (MRR) for different classes of assets.

For underlying loans with an original maturity of 24 months or less, the MRR shall be 5 per cent of the book value of the loans being securitised. It will be 10 per cent for loans with an original maturity of more than 24 months.

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.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Fri, September 24 2021. 20:04 IST
RECOMMENDED FOR YOU
.