RBI Proposes Comprehensive Framework for Banks to Stay Protected from NPAs

The Reserve Bank proposed a comprehensive framework for sale of loan exposures, which could be standard, sub-standard or non-performing assets (NPAs), as part of the overall exercise to deepen the market for lending.

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.

Presently, the guidelines for sale of loan exposures, both standard as well as stressed exposures, are spread across various circulars of the RBI.

"A dynamic secondary market for bank loans will also 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," the RBI said while issuing the comprehensive draft framework for sale of loan exposure.

The stakeholders can send their comments on the draft framework to the RBI by June 30.

Lenders, the RBI said, resort to loan sales for reasons ranging from strategic sales to rebalance their exposures or as a means to achieve resolution of stressed assets by extinguishing the exposures.

The draft guideline proposed by the RBI for sale of loan exposures deals with various issues like asset classification of the loan to be transferred, nature of entity purchasing loan and mode of transfer of loans.

As per the draft framework, standard assets would be allowed to be sold by lenders through assignment, novation or a loan participation contract (either funded participation or risk participation).

The stressed assets, however, would be allowed to be sold only through assignment or novation only, the draft said adding, "stressed assets 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.

A dynamic secondary market for bank loans will also 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, the draft said.