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Reserve Bank of India (RBI) has issued separate master directions on transfer of loan exposures and securitisation of standard assets. These master directions came after considering public comments on draft rules issued on June 8, 2020.

On securitisation of standard assets, RBI said that while complicated and opaque securitisation structures could be undesirable with the perspective of financial stability, prudentially structured securitisation transactions can be an important facilitator in a well-functioning financial market as it improves risk distribution and liquidity of lenders in originating fresh loan exposures.

This master direction will apply to all scheduled commercial banks, excluding regional rural banks, all-India term financial institutions, small finance banks, and NBFCs.

In the Master Direction Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021, RBI specified the Minimum Retention Requirement (MRR) for different asset classes.

For underlying loans with original maturity of 24 months or less, the MRR will be 5 per cent  of the book value of the loans being securitised. For those with original maturity of more than 24 months as well as loans with bullet repayments, the MRR shall be 10 per cent of the book value of the loans being securitised.

In the case of residential mortgage-backed securities, the MRR for the originator shall be 5 per cent of the book value of the loans being securitised, irrespective of the original maturity.

The minimum ticket size for issuance of securitisation notes shall be 1 crore, the direction added.

The central bank also issued Reserve Bank of India (Transfer of Loan Exposures) Directions, 202, which requires banks and other lending institutions to have a comprehensive board-approved policy for such transactions.

Lenders resort to loan transfers for various reasons, ranging from liquidity management, rebalancing their exposures or strategic sales. Also, a robust secondary market in loans will help in creating additional avenues for raising liquidity, the RBI said.

The master direction has also prescribed a minimum holding period for different categories of loans after which they shall become eligible for transfer.

“The lenders must put in place a comprehensive Board approved policy for transfer and acquisition of loan exposures under these guidelines. These guidelines must...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," said the Master Direction.

The master direction directs that “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 specify the distribution of the principal and interest income from the transferred loan between the transferor and the transferee(s), it added.

'Transferor' means the entity which transfers the economic interest in a loan exposure, while 'transferee' refers to the entity to which the economic interest in a loan exposure is transferred.

It further said a transferor "cannot re-acquire" a loan exposure, either fully or partially, that had been transferred by the entity previously, except as a part of a resolution plan.

Further, “the transferee(s) should have the unfettered right to transfer or otherwise dispose of the loans free of any restraining condition to the extent of economic interest transferred to them".

The master direction also provides a procedure for the transfer of loans that are not in default.

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