RBI issues Master Direction for Transfer of Loan Exposures

On Friday, the Reserve Bank of India (RBI) has issued a Master Direction on loan transfer for banks and NBFCs. Loan transfers are performed  by banks and other financial institutions for managing liquidity, rebalancing their exposures or strategic sales and other purposes. As per the fresh RBI mandate, "the provisions of the direction are applicable will be effective from the date of issue, i.e., September 24, 2021." 

On the applicability of the new mandate, the RBI direction said, "All Scheduled Commercial Banks (including Small Finance Banks but excluding Regional Rural Banks); All All-India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI); All Non-Banking Financial Companies (NBFCs) including Housing Finance Companies (HFCs)."  

The RBI's Master Direction states, "The lenders must put in place a comprehensive Board approved policy for transfer and acquisition of loan exposures under these guidelines. These guidelines must, inter alia, 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. Further, the policy must also ensure independence of functioning and reporting responsibilities of the units and personnel involved in transfer/acquisition of loans from that of personnel involved in originating the loans. All transactions must meet the requirements as detailed in the policy." 

Further, the Master Direction added, "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. In case of any retained economic interest in the exposure by the transferor, the loan transfer agreement should clearly specify the distribution of the principal and interest income from the transferred loan between the transferor and the transferee(s)."