RBI Issued Master Directions on Securitisation of Standard Assets, Transfer of Loan Exposures

On September 24, 2021, the Reserve Bank of India (RBI) issued the master directions of RBI (Securitisation of Standard Assets) Directions, 2021, and RBI (Transfer of Loan Exposures) Directions, 2021.

• Background: In June 2020, RBI issued the draft framework for Securitisation of Standard Assets and Transfer of Loan Exposures. The master directions are issued after considering public comments on the draft rules.

Master Directions on Securitisation of Standard Assets 2021:

a.Eligibility: Loans with tenor up to 24 months extended to individuals for agricultural activities (where both interest and principal are due only on maturity) and Trade receivables with tenor up to 12 months (discounted/purchased by lenders from their borrowers) will be eligible for securitisation.

• Applicability: The master directions are applicable to all scheduled commercial banks (excluding Regional Rural Banks), all-India term financial institutions (NABARD, NHB, EXIM Bank, and SIDBI), small finance banks, and Non Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs).

b.Minimum Retention Requirement (MRR):

The MRR was formed to ensure that the originators have a continuing stake in the performance of securitised assets. RBI specified the MRR for different asset classes as follows.

i.Loans: 

• For loans with maturity of 24 months or less, the MRR should be 5 percent of the book value of the loans being securitised.
• For loans with original maturity of more than 24 months and loans with bullet repayments, the MRR shall be 10 percent of the book value of the loans being securitised.

ii.For residential mortgage backed securities, the MRR for the originator should be 5 percent of the book value of the loans being securitised (irrespective of the original maturity).

c.Issuance and Listing: The minimum ticket size for issuance of securitisation notes should be Rs 1 crore.

Master Directions on Transfer of Loan Exposures 2021:

The 2021 Directions on Transfer of Loan Exposures will boost liquidity in the system further and improve transparency and corporate governance.

i.Transfer of stressed loans: RBI has allowed the transferring of loan exposures classified as fraud (i.e. the stressed loans) to Asset Reconstruction Companies (ARCs).

• This direction came as a backdrop of the banks reported frauds aggregating Rs 3.95-lakh crore between FY19 and FY21.

Applicability: Scheduled Commercial Banks; Regional Rural Banks; Primary (Urban) Co-operative Banks/State Co-operative Banks/District Central Co-operative Banks; All India Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI); Small Finance Banks; and All Non Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs).

ii.Stressed loans that are in default for more than 60 days are classified as non-performing assets (NPA), and can be transferred to ARCs.

iii.Prior to the master direction, when an account is declared fraud, banks had to set aside 100 percent of the outstanding loan as provision. But now banks could recover a part of the loan and ARCs also could buy debt lower than regular loan accounts.

iv.The transfer of stressed loans of Rs 100 crore or more negotiated on a bilateral basis between lenders and permitted acquirers, including ARCs, must be followed by an auction through the Swiss Challenge method.

• They can shift the responsibility of reporting, monitoring and filing of complains with law enforcement agencies and proceeding related to bad loans to the ARCs.

Note – The transferor shall transfer the stressed loans to transferee(s) other than ARCs only on a cash basis.

Minimum Holding Period (MHP): 

i.It is the minimum period for which a transferor must hold the loan exposures before it is transferred to transferees. MHP should be calculated from the date of first repayment of the loan

ii.MHP is 3 months in case of loans with tenor of up to 2 years and 6 months in case of loans with tenor of more than 2 years.

Note –  These directions were issued in exercise of the powers conferred by the Sections 21 and 35A of the Banking Regulation Act, 1949, Chapter IIIB of the RBI Act, 1934, and Sections 30A, 32 and 33 of the National Housing Bank Act, 1987.

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About Reserve Bank of India(RBI):

Establishment – 1st April 1935
Headquarters– Mumbai, Maharashtra
Governor – Shaktikanta Das
Deputy Governors – Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar