The Reserve Bank of India (“RBI”), on December 5, 2022, amended the Master Direction - Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (“Directions”). A brief overview of the key amendments are as follows:

1. Overseas branches of scheduled commercial banks have been permitted to:

• acquire only ‘not in default’ loan exposures from a financial entity operating and regulated as a bank in the host jurisdiction;
• transfer exposures ‘in default’ as well as ‘not in default’ pertaining to resident entities to a financial entity operating and regulated as a bank in the host jurisdiction;
• transfer exposures ‘in default’ as well as ‘not in default’ pertaining to non-residents, to any entity regulated by a financial sector regulator in the host jurisdiction.

The aforesaid acquisitions and transfers should be in compliance with the requirements prescribed in the Directions, without derogation of any other statutory or regulatory provisions, including those prescribed under Foreign Exchange Management Act, 1999.

2. The term ‘economic interest’ has been defined to mean “the risks and rewards that may arise out of loan exposure through the life of the loan exposure”.

3. In connection with the minimum holding period for loans, it has been clarified that such period will be calculated from the date of registration of the underlying security interest with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).

4. The Directions provided that in case of transfer of stressed loans pursuant to a resolution plan under the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 to an entity which is neither an asset reconstruction company (“ARC”) nor a ‘permitted transferee’ as specified in the Directions, the transfer shall be subject, inter alia, to the condition that the lenders should not take any credit/ investment exposure apart from working capital facilities to the borrower whose loan account is transferred, for at least 3 (three) years from the date of such transfer.
   It has now been clarified that the aforesaid working capital facilities should be sanctioned to the borrower by lenders who are not transferors.

5. The Directions earlier provided that stressed loans which are in default for more than 60 (sixty) days or classified as non-performing asset are permitted to be transferred to ARCs. Pursuant to the amendment, all stressed loans which are in default in the books of the transferors are permitted to be transferred to ARCs.

6. Clause 77A has been inserted to provide the valuation methodology for investment in security receipts (“SRs”). If the investment by the transferor in SRs issued against loans transferred by it is more than 10% (ten percent) of all SRs issued against the transferred asset, the valuation of the SRs on the books of the transferor shall be the lower of the (i) the Net Asset Value (NAV) declared by the ARC based on the recovery ratings received for such SRs; and (ii) the face value of the SRs reduced by the notional provisioning rate applicable if the loans had continued on the books of the transferor. In respect of valuation of investment in SRs outstanding as on September 24, 2021, the difference between the carrying value of such SRs and the valuation arrived in the manner provided above can be provided over a 5 (five) year period i.e., from FY 2021-22 till FY 2025-2

Please find a copy of the updated Directions, here.

This update has been contributed by Aastha (Partner) and Amisha Agarwal (Associate)

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