RBI allowed lenders to transfer their loan exposures classified as fraud to asset reconstruction companies (ARCs). It stressed on disclosures and told lenders to include the financial impact of any transfer into their profit and loss account for the period when the transfer is completed. It has also allowed lenders to securitise single loans and loans with bullet payments allowing more flexibility to them.
“These measures are far more relaxed than the previous guidelines and offer more bandwidth to lenders in their liquidity management. But we are a little surprised about the timing of it since most lenders, especially the large ones, are flush with liquidity at present,” a senior official with a rating firm said.
The regulator has also offered relief to lenders by allowing them to shift the responsibility of reporting, monitoring, filing of complaints with law enforcement agencies and proceedings related to fraudulent loans to the ARCs.
These are part of the sweeping changes RBI announced in the loan transfer and securitisation rules. The regulator has mandated banks to follow a board approved policy on this subject. It has directed banks to ensure that arm’s length distance is maintained between personnel involved in transfer/ acquisition of loans and the originator of the loan.
These directions come into immediate effect. Transfer of loans allows lenders to improve liquidity and rebalance exposures.
The transfer of such loan exposures to an ARC, however, does not absolve the bank from fixing the staff accountability as required under the extant instructions on frauds, RBI said.
“Any loss or profit arising because of transfer of loans, which is realised, should be accounted for accordingly and reflected in the Profit & Loss account of the transferor for the accounting period during which the transfer is completed. However, unrealised profits, if any, arising out of such transfers, shall be deducted from common equity tier 1 capital (CET1) or net owned funds for meeting regulatory capital adequacy requirements till the maturity of such loans,” RBI said.
In case of transfer of a pool of loans, the transferee(s), and the transferor(s) in case of retention of economic interest, should maintain borrower-wise accounts. Thus, the exposures of the transferor(s) and the transferee(s) would be to the individual obligors in a pool of loans.
The transferor can transfer loans after three months for debt with tenure up to two years and six months for other longer tenure exposures.
RBI last year issued two draft frameworks — one for securitisation of standard assets and the other on sale of loan exposures.
Final guidelines include changes suggested by stakeholders.
For securitisation deals, RBI makes a liquidity facility in-built to help smooth the timing differences faced by the special purpose entity between the receipt of cash flows from the underlying assets and the payments to be made to investors. A liquidity facility should meet all of the following conditions to guard against the possibility of the facility functioning as a form of credit enhancement and/ or credit support.