Jhe Reserve Bank of India (RBI) issued the Lending Exposure Transfer Instructions, 2021 (Instructions) in September 2021 which prescribes 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 guidelines apply to all forms of loan transfer, including novation, assignment, and loan participation.
Based on the recommendation of the Corporate Loan Secondary Market Development Task Force, the Housing Finance Securitization Market Development Committee in India and the public responses received, it has been decided to separate the regulatory guidelines for direct sale transactions, securitization guidelines, and to review the guidelines for the sale of standard and stressed exposures, which currently appear in a number of circulars.
The guidance makes the existing guidelines consistent with the new resolution paradigm in the form of the Insolvency and Bankruptcy Code, 2016 (IBC) and the prudential framework for the resolution of distressed assets issued by the Circular of 7 June 2019 (prudential framework). The instructions are specific to the asset classification of the transferred loan exposure; the nature of the entity and the mode of transfer.
Other important provisions of the guidelines include situations where, in loan participation transactions, legal ownership remains fully with the assignor even after the beneficial interest has passed to the assignee. In such cases, the roles and responsibilities of the assignor and the assignee must be clearly defined contractually. Loan transfers must entail the transfer of economic interests without modifying the loan contract. If there are any changes, such as take-home financings, they will be assessed 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 the 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 allocation of principal and interest income. The assignee should have the absolute right to transfer or otherwise dispose of the loans without any restrictive conditions, including any consent requirements for resolution or recovery, to the extent of the economic interest transferred to them.
Lenders, whether transferor or not, must not offer credit enhancement or liquidity facilities in any form in the event of a loan transfer. A transferor cannot repurchase a loan exposure, in whole or in part, that was previously transferred by the entity, except under the prudential framework or the IBC.
In domestic transactions, the transferee must ensure that the transferor has strictly adhered to the minimum holding period (MHP) requirements, which are three months for loans up to two years and six months for loans over long duration. For project loans, the duration is calculated from the start date of the commercial operations of the financed project. The MHP is not applicable to the transfer of syndicated credits.
A transferor may transfer a single loan or a portfolio of loans that are not in default to permitted transferees by assignment or novation, or a loan participation agreement. The transfer must be made in cash, received no later than the time of transfer, in a transparent and arm’s length manner. Where transfers result in a change of lender of record under a loan agreement, the transferor and transferee must ensure that the existing loan agreement provides for the borrower’s consent to such transactions.
Distressed loans must be transferred only by assignment or novation, not by participation in the loan. Lenders should transfer distressed loans, including through bilateral sales or electronic auction platforms, only to authorized assignees and asset reconstruction companies. The transferor shall not assume any operational, legal or any other type of risk relating to the transferred loans, including any additional financing or commitments to the borrower or transferee relating to the transferred loan.
Aditya Vikram Doua is an associate partner and Parvati Menon is a partner in SNG & Partners.
SNG & Partners
One Bazaar Lane, Bengali Market
New Delhi – 110001
Tel: +91 11 4358 2000