RBI amends TLE Directions

Para

Existing Provision

Amended Provision

Impact/Our comments

Applicability Clause

3

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Provided that:

XX

(iii) Overseas branches of lenders specified at (a) shall be permitted to:

a) Acquire only ‘not in default’ loan exposures from a financial entity operating and regulated as a bank in the host jurisdiction.

b) 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.

c) 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.

By adding this proviso, the RBI has clarified that overseas branches of banks can undertake following types of TLE transactions:

(i) Acquiring only loans which are not in default from another Indian or foreign bank

(ii) Transfer all kinds of exposures whether in default or not, pertaining to resident entities to another bank

(iii) Transfer all kinds of exposures, whether in default or not, pertaining to non-residents to any financial sector entity in India or abroad.

There seems to be a conflict with the recent notification issued by the RBI December 1, 2022^[1], which allows foreign branches of Indian banks or branches set up in IFSC, to deal in structured products which are otherwise not allowed under the Indian regulations.

Should a foreign branch of an Indian bank wish to acquire defaulted loans, there seems to be a conflict on which provision shall prevail.

Explanation: The above proviso shall be without prejudice to the provisions of Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021.

Explanation: The above proviso shall be without prejudice to the provisions of Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021; Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019; obtention of guarantees; or products explicitly permitted in terms of RBI guidelines.

This means that in case of loans are transferred as invocation of guarantees extended in terms of provisions of RBI guidelines, the same shall not fall under TLE Directions.

9

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(d) “Economic Interest” refers to the risks and rewards that may arise out of loan exposure through the life of the loan exposure

The definition of economic interest has been added. We do not see any major implications of the same.

Minimum Holding Period

39

The transferor can transfer loans only after a minimum holding period (MHP), as prescribed below, which is counted from the date of registration of the underlying security interest

The transferor can transfer loans only after a minimum holding period (MHP), as prescribed below, which is counted from the date of registration of the underlying security interest with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI)

Earlier, the directions stated that MHP shall be counted from the date of registration of security interest. It has now been specified that such registration shall be done with CERSAI.

We had earlier taken a view that such registration shall be done in terms of provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002^[2].

In the absence of the said clarification, the industry had developed a practice of considering other registrations of security interest as well for the purpose of computing MHP. For example registration of motor vehicle under the Motor Vehicles Act, 1988, stating that the vehicle is hypothecated.

With this clarification, it becomes clear that for secured creditors, registration of the security interest with CERSAI shall be considered. Further, as for loans on which security interest cannot be created/registered with CERSAI, the date of first repayment shall be considered for counting MHP.  

Valuation

53

However, in case the credit exposure being transferred (without netting for provisions), is Rs.100 crore or more, the transferor shall obtain two external valuation reports.

However, in case the credit exposure being transferred (without netting for provisions), singly, jointly or severally, is Rs.100 crore or more, the transferor shall obtain two external valuation reports.

The said addition seems to be indicating that exposure of other lenders, whose exposure is being transferred, shall be considered jointly for determining the said limit of INR 100 crores or more.

Transfer under a Resolution Plan

58

Notwithstanding the stipulations in Clauses 54-57, if the transfer of stressed loans are undertaken as a resolution plan under the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 resulting in an exit of all lenders specified at Clause 3 from the stressed loan exposure, such transfer is permitted to any class of entities, including a corporate entity, that are permitted to take on loan exposures in terms of a statutory provision or under the regulations issued by a financial sector regulator, and which are listed in the Annex. The Annex will be updated as and when any new class of entities is permitted by the respective financial sector regulators. In case such transferee(s) are neither ARCs nor permitted transferees, the transfer shall be additionally subject to the following conditions:

XX

(iv) The lenders specified at Clause 3 should not grant credit facilities apart from working capital facilities (which are not in the nature of term loans) to the borrower whose loan account is transferred, for at least three years from the date of such transfer.

(v) Further, for at least 3 years from the date of such transfer, the lenders specified at Clause 3 should not grant any credit facilities to the transferees) for deployment, either directly or indirectly, into the operations of the borrower.

Notwithstanding the stipulations in Clauses 54-57, if the transfer of stressed loans are undertaken as a resolution plan under the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 resulting in an exit of all lenders specified at Clause 3 from the stressed loan exposure, such transfer is permitted to any class of entities, including a corporate entity, that are permitted to take on loan exposures in terms of a statutory provision or under the regulations issued by a financial sector regulator, and which are listed in the Annex. The Annex will be updated as and when any new class of entities is permitted by the respective financial sector regulators. In case such transferee(s) are neither ARCs nor permitted transferees, the transfer shall be additionally subject to the following conditions:

XX

(iv) The lenders specified at Clause 3 should not take any credit/investment exposure apart from working capital facilities (which are not in the nature of term loans) to the borrower whose loan account is transferred, for at least three years from the date of such transfer.

Provided that the working capital facilities are sanctioned by the lenders which are not transferors.

(v) Further, for at least 3 years from the date of such transfer, the lenders specified at Clause 3 should not take any credit/investment exposure to the transferee(s) for deployment, either directly or indirectly, into the operations of the borrower.

In case of loans acquired as part of a resolution plan, the lenders were not allowed to take further credit exposure on the relevant borrower, except for providing working capital facilities.

The said bar has now been extended to undertaking investment exposure as well. Resultantly, lenders shall neither be allowed to lend to or invest in securities of the borrower undergoing a resolution, except for providing working capital facilities. Further, such working capital facility cannot be provided by any of the transferors under the resolution plan.

Transfer of assets to ARCs

73

Subject to the provisions of the circulars DNBR.PD (ARC) CC.No.07/26.03.001/2018-19 dated June 28, 2019 and DOR.NBFC(ARC) CC. No. 8/26.03.001/2019-20 dated December 6, 2019, stressed loans which are in default for more than 60 days or classified as NPA are permitted to be transferred to ARCs.

Subject to the provisions of the circulars DNBR.PD (ARC) CC.No.07/26.03.001/2018-19 dated June 28, 2019 and DOR.NBFC(ARC) CC. No. 8/26.03.001/2019-20 dated December 6, 2019, all stressed loans which are in default in the books of the transferors are permitted to be transferred to ARCs.

ARCs were earlier allowed to acquire loans 60+ DPD loans or NPAs. The scope of assets that an ARC can acquire has now been extended to all loans in default i.e. 1-60 DPD as well.

Valuation of SRs

77 and 77A

Provided further that when the investment by a transferor in SRs backed by stressed loans transferred by it, is more than 10 per cent of all SRs backed by its transferred loans and issued under that securitisation, the valuation of such SRs by the transferor will be additionally subject to a floor of face value of the SRs reduced by the provisioning rate as applicable to the underlying loans, had the loans continued in the books of the transferor.

If the investment by the transferor in SRs issued against loans transferred by it is more than 10 percent of all SRs issued against the transferred asset, then the valuation of the SRs on the books of the transferor shall be the lower of the following:

i) value arrived at in terms of clause 77; and

ii) face value of the SRs reduced by the notional provisioning rate applicable if the loans had continued on the books of the transferor.

Provided that in respect of valuation of investment in SRs outstanding in the books of lenders specified at sub-clauses 3(b), 3(c), 3(d), 3(f) and Local Area Banks, as on the date of issuance of these directions (September 24, 2021), the following treatment shall be applicable:

a) The difference between the carrying value of such SRs and the valuation arrived at in terms of this clause, as on the next financial reporting date after the date of issuance of these directions, may be provided over a five-year period starting with the financial year ending March 31, 2022 – i.e. from FY 2021-22 till FY 2025-26.

b) Subsequent valuation of investments in such SRs on an ongoing basis shall, however, be strictly in terms of the provisions of these directions.

c) Lenders concerned shall put in place a board approved plan to ensure that the provisioning made in each of the financial years in compliance of sub-clause (a) above is not less than one fifth of the required provisioning on this count.

d) Valuation of investments in SRs made by all lenders after the issuance of these directions shall be strictly in terms of the provisions of these directions.

The RBI had allowed a period 5 years for providing for the difference between the carrying value of the SRs and the valuation arrived at in terms of these directions, vide notification dated June 28, 2022^[3].

The aforementioned notification has been imbibed in TLE Directions as para 77A.