The Reserve Bank of India (RBI) issued the Transfer of Loan Exposures Directions, 2021 (directions) in September 2021, which prescribe a comprehensive and robust framework to facilitate the sale, transfer and acquisition of loan assets, both standard and stressed, in the secondary market by lenders. These directions are applicable to all forms of loan transfers, including novation, assignment and loan participation.
Based on the recommendation of the Task Force on the Development of Secondary Market for Corporate Loans, the Committee on Development of Housing Finance Securitisation Market in India and the public responses received, it was decided to separate the regulatory guidelines for direct assignment transactions from the securitisation guidelines, and to revisit the guidelines for the sale of both standard and stressed exposures, which currently are contained in a number of circulars.
The directions make existing guidelines consistent with the changed resolution paradigm in the form of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Prudential Framework for Resolution of Stressed Assets issued by way of the circular of 7 June 2019 (prudential framework). The directions are specific to the asset classification of the loan exposure being transferred; the nature of the entity, and the mode of transfer.
Other important provisions of the directions include situations where, in loan participation transactions, the legal ownership remains entirely with the transferor even after the beneficial interest has been transferred to the transferee. In such cases, the roles and responsibilities of the transferor and transferee shall be clearly delineated contractually. Loan transfers should result in the transfer of economic interest with no change in the loan contract. If there are any modifications, such as take-out financing, they shall be evaluated against the definition of restructuring contained in the prudential framework.
A loan transfer should result in the immediate removal of the transferor from the risks and rewards associated with loans to the extent that the economic interest has been transferred. In the case of any retained economic interest, the loan transfer agreement should clearly specify the distribution of the principal and interest income. The transferee should have the unfettered right to transfer or otherwise dispose of the loans free of any restraining conditions, including any consent requirement when it comes to resolution or recovery, to the extent of the economic interest transferred to them.
Lenders, regardless of whether they are transferors or otherwise, should not offer credit enhancements or liquidity facilities in any form in the case of loan transfers. A transferor cannot re-acquire a loan exposure, either fully or partially, that has been transferred by the entity previously, except under the prudential framework or the IBC.
In domestic transactions, the transferee should ensure that the transferor has strictly adhered to the minimum holding period requirements (MHP), which are three months for loans up to two years, and six months for loans of longer periods. For project loans, the period is calculated from the date of commencement of commercial operations of the project being financed. MHP is not applicable to the transfer of syndicated loans.
A transferor may transfer a single loan or a portfolio of loans that are not in default to permitted transferees through assignment or novation, or a loan participation contract. The transfer shall be for cash, received no later than at the time of transfer, transparently on an arm’s length basis. Where transfers result in a change of lender of record under a loan agreement, the transferor and transferee should ensure that the existing loan agreement provides for consent by the borrower to such transactions.
The transfer of stressed loans must be through assignment or novation only, not through loan participation. Lenders shall transfer stressed loans, including by way of bilateral sales or e-auction platforms, only to permitted transferees and asset reconstruction companies. The transferor must not assume any operational, legal or any other type of risks relating to the transferred loans, including additional funding or commitments to the borrower or transferee that relate to the loan transferred.