RBI proposes comprehensive framework for sale of loans

  • What are loan sales?

  • What are the highlights of the draft?

  • What is the relevance of this framework?

  • What is the significance of this framework?

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GS paper 3 ( Indian economy)

What is the context about?

  • RBI has released draft Framework for ‘Sale of Loan Exposures’.
  • The move is aimed at building a robust secondary market for bank loans that could ensure proper price discovery and can be used as an indicator for impending stress.

What are loan sales?

Loan sales may be resorted to by lenders for any reasons ranging from strategic sales to rebalance their exposures or as a means to achieve resolution of stressed assets by extinguishing the exposures.

Highlights of the draft:

  • Standard assets would be allowed to be sold by lenders through assignment, novation or a loan participation contract (either funded participation or risk participation).
  • Stressed assets would be allowed to be sold only through assignment or novation only. They may be sold to any entity that is permitted to take on loan exposures by its statutory or regulatory framework.
  • The draft lays down norms for sale of NPAs to Asset Reconstruction Companies (ARCs) also buy back of NPAs in case the ARCs manage to turn them into standard assets.
  • The draft also proposes to do away with the requirement of Minimum Retention Requirement (MRR) for sale of loans by lenders.

Relevance:

  1. These guidelines will be applicable to commercial banks, all financial institutions, non-banking finance companies and small finance banks.
  2. The directions will be applicable to all loan sales, including sale of loans to special purpose entities for the purpose of securitisation.

Significance of these guidelines:

A dynamic secondary market for bank loans will ensure proper discovery of credit risk pricing associated with each exposure, and will be useful as a leading indicator for impending stress, if any, provided that the volumes are sufficiently large.