RBI proposes deregulation in NPA price discovery

This is a clear shift from its earlier stance prescribing the adoption of the Swiss challenge method for the sale of stressed assets

Shayan Ghosh
Updated9 Jun 2020
RBI proposed that lenders put an approved policy in place on adopting auction-based models for price discovery.
RBI proposed that lenders put an approved policy in place on adopting auction-based models for price discovery. (Photo: Mint)

The Reserve Bank of India (RBI) on Monday said the price discovery process may be deregulated during sale of bad loans by financial institutions such as banks, non-bank lenders and housing finance companies (HFCs).

In its draft framework for the sale of loan exposures, the regulator proposed that lenders can put in place a board-approved policy on adopting auction-based models for price discovery. This is a clear shift from its earlier stance prescribing the adoption of the Swiss challenge method for the sale of stressed assets.

Under the Swiss challenge method, a prospective buyer offers a bid to the lender, which then publicly calls for counter-bids from other prospective buyers. Once bids are received, the bank first invites the securitization company, if any, which has acquired the highest significant stake to match the highest bid. Then, in order of preference, is the securitization company, the original bidder and then the highest bidder during the counter-bidding process.

That apart, the central bank also said that the sale of standard assets can be made by way of assignment, novation or a loan participation contract, whereas the sale of stressed assets may be by assignment or novation. According to the Investopedia, a website that demystifies financial jargons, novation is the act of substituting a valid existing contract with a replacement contract.

The draft framework also seeks to allow sale of stressed assets to any entity that is permitted to take on loan exposures by its statutory or regulatory framework.

“The transferee in the case of stressed assets need not be a financial entity. However, the transferors shall conduct necessary due diligence in this regard and clearly establish that the transferee is not a person disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016,” RBI said.

Meanwhile, as part of the process followed by RBI for its guidelines, it has sought comments on the draft framework and the response to specific discussion questions by email by 30 June.

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