The Reserve Bank of India has revised its rules for securitisation and sale of loans to help banks improve liquidity and rebalance exposures.

The revamp expands the types of assets that can be transferred and allows buyers other than asset reconstruction companies (ARCs) to acquire stressed assets. It also makes it mandatory for lenders to put in place a comprehensive board-approved policy for the sale of stressed assets.

The master directions – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, and Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 – will be effective from 24 September 2021.

The RBI has now allowed lenders to transfer advances classified as fraud to ARCs. Earlier, banks could not sell such loans and had to recover it themselves. Now, they can sell them to third-party recovery specialists, allowing them to recover a portion of the outstanding dues upfront and focus on their core businesses. It has also allowed lenders to securitise single loans and loans with bullet payments, allowing more flexibility to them.

While only ARCs were allowed to acquire stressed loan exposures, the directions now allow non-ARCs – such as scheduled commercial banks, all India financial institutions (such as NABARD, NHB, EXIM Bank and SIDBI), small finance banks, all non-banking finance companies including housing finance companies (HFCs) and ARCs – to buy stressed assets.

However, for non-ARC buyers, only a cash sale is allowed and it has to be paid fully upfront before the transfer of assets. Buyers must hold the assets for at least six months, and must assign 100% risk weight to non-performing assets (NPAs) during the purchase.

Also, the stressed assets can be sold to any class of entity only as part of a resolution plan, which would result in an exit of all lenders. Such an acquirer cannot itself be classified as an NPA or seek funding from the banks/HFCs for acquiring such assets.

The RBI has allowed lenders to sell loans using e-auction platforms to attract buyers.

“The lenders must put in place a comprehensive board-approved policy for transfer and acquisition of loan exposures under these guidelines,” according to the RBI directions. “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, and periodic board level oversight,” the RBI says.

“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.

“Loan transfers should result in transfer of economic interest without being accompanied by any change in underlying terms and conditions of the loan contract, usually. 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.”

The direction also introduces a minimum holding period before transferring of loans, which is counted from the date of registration of the underlying security interest: Three months in case of loans with tenor of up to two years; and six months in case of loans with tenor of more than two years.

In the Master Direction Reserve Bank of India (Securitisation of Standard Assets) Directions, the central bank has specified a 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% of the book value of the loans being securitised. It will be 10% for loans with an original maturity of more than 24 months.

In the case of residential mortgage-backed securities, the MRR will be 5% of the book value of the loans being securitised. These directions mandate lenders to have a policy for ongoing identification and resolution of stressed assets across thresholds.