Transfer of Loan Exposures Policy
1. MyLoanCare Ventures Private Limited is a Private Limited Company registered under the Companies Act, 2013 vide CIN U65100DL2013PTC258637 and registered with the Reserve Bank of India as a Type-II Base Layer Non-Systemically Important, Non-Deposit taking, Non-Banking Finance Company under the category NBFC- ICC vide CoR N-14.03560 dated 23rd Sep, 2021.
2. The Reserve Bank of India has issued comprehensive master directions titled Master Directions – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 vide ref number DOR.STR.REC.52/21.04.048/ 2021-22 dated September 24, 2021, as amended from time to time (hereinafter referred to as “RBI TLE Guidelines”), stipulating certain requirements to be adhered to for acquisitions / transfer of loan assets between permitted regulated entities as per Clause 3 of the said RBI TLE Guidelines to ensure that a proper policy framework on acquisitions and transfers of loan assets be formulated and put in place with the approval of the respective Board of the regulated entity.
3. Thus, in compliance with the said master direction, the following Transfer of Loan Assets Policy of the Company is approved by the Board of Directors of the Company. This policy is subject to periodic review by the Board of the Company at its discretion and in any case at least once every year. The Company may communicate the Transfer of Loan Assets Policy to its customers and business partners by uploading the same on its website.
4. This policy is applicable to both situations, that is where the Company acts as a transferee (acquisition by way of transfer from another permitted entity) or as a transferor (sale by way of transfer to another permitted entity).
5. Terms used in this Policy, unless otherwise defined shall have the same meaning as assigned to them in the RBI TLE Guidelines.
6. In case any aspects are not specifically addressed in this policy or in case of any disconnect between the policy and the RBI TLE Guidelines, such matters shall be dealt with as per the provisions of the RBI TLE Guidelines.
7. This policy is effective from 16th January, 2023 and shall be effective unless reviewed or repealed.
8. Transfer of loan transactions, if any, entered into by the Company prior to adoption of this policy shall continue to be valid and subsisting and any non-conformity with this policy shall not affect validity of such transactions.
B. Eligible Counterparties and Transactions
9. The Company may, enter into a transfer of loan assets transaction with any entity permitted to do so as per RBI TLE Guidelines, currently being:
(a) Scheduled Commercial Banks;
(b) Regional Rural Banks;
(c) Primary (Urban) Co-operative Banks/State Co-operative Banks/ Central Co-operative Banks;
(d) All India Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);
(e) Small Finance Banks; and
(f) All Non Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs).
(i) Lenders specified at sub-clauses (b) and (c) above are permitted as only transferor(s) of stressed loans under Chapter IV of RBI TLE Guidelines and are not permitted as transferors(s) or transferee(s) in any other type of loan transfers.
(ii) When acting as a transferee, the Company shall only do so from a transferor specified as a lender above unless specifically permitted.
(iii) The Company shall not enter into such transactions with overseas branches of lenders specified at (a)
(iv) When acting as a transferor, the Company shall not 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 under the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 or as part of a resolution plan approved under the Insolvency and Bankruptcy Code, 2016.
10. Company shall not undertake any loan transfers or acquisitions other than those permitted under RBI TLE Guidelines and in the manner prescribed therein.
11. This policy shall govern all loan transfers undertaken by the Company, including sale of loans through novation or assignment, and loan participation. In cases of loan transfers other than loan participation, legal ownership of the loan shall be mandatorily transferred to the transferee(s) to the extent of economic interest transferred. However, the transfer of stressed loans must be done through assignment or novation only; loan participation is not permitted in the case of stressed loans.
C. Minimum Quantitative and Qualitative Standards
12. All loan takeover transactions by the Company shall only be in strict compliance with the RBI TLE Guidelines and this policy. Minimum standards as given below shall be adhered to in all such transactions:
(a) Due diligence – the Company shall carry out due diligence on:
(i) The counterparty of transaction and ensure that the counterparty is eligible and authorized to undertake the transaction as per the RBI TLE Guidelines;
(ii) The loan/ portfolio being transacted in terms of its compliance with applicable regulations including KYC of customers, loan documents, their repayment track record, security (if any) and other aspects similar to what would be undertaken by the Company when advancing credit to customers
(b) Objectives – when acting as a transferee of stressed loans, stated objectives for acquiring the loan/ portfolio shall be clearly documented.
(c) Valuation – the valuation of the loan/ portfolio shall taken into account, inter alia,
(i) Outstanding principal
(ii) Accrued interest and other charges
(iii) Projected cash flow
(iv) Security (if any)
(v) Applicable discount rate; provided that the discount rate used by the transferor in the internal valuation exercise shall also be spelt out in the policy. This may be either cost of equity or average cost of funds or opportunity cost or some other relevant rate, subject to a floor of the contracted interest rate charged.
The valuation exercise may be carried out internally. However, when the Company is acting as a transferor and the credit exposure being transferred (without netting for provisions), singly, jointly or severally, is Rs.100 crore or more, it shall obtain two external valuation reports.
(d) Requisite IT systems for capture, storage and management of data – appropriate entries shall be made in the loan management system in use and data / information in respect of all loans/ portfolio to be transacted shall be available in the company’s systems including loan management system, document management system and collection management system.
(e) Risk management – when acting as a transferee, the Company shall ensure that it has requisite skills to manage the risk associated with the acquired loan/ portfolio
(f) Periodic Board level oversight -
(i) When acting as a transferor, the Board shall monitor the adherence to this policy and any actively manage any counterparty risks associated with the proposed transaction
(ii) when acting as a transferee, the Board shall monitor the performance of the portfolio and make amends to the policy based on the same for future
D. Process of Transfer and Checks To be Undertaken
13. Delegation of powers and ensuring independence - In order to ensure independence of functioning and reporting responsibilities of the units and personnel involved in transfer / acquisition of loans from that of personnel involved in originating the loans, final decision in respect of any loan takeover transactions shall be taken only by the Corporate Finance team and be duly approved by the Board of the Company.
14. The takeover proposal shall be presented to the Board for approval and be executed on and subject to approval by the Board only.
15. Loan transfers must result in transfer of economic interest without being accompanied by any change in underlying terms and conditions of the loan contract.
(a) In all cases, if there are any modifications to terms and conditions of the loan contract during and after transfer (eg. in take-out financing), the same shall be evaluated against the definition of ‘restructuring’ provided in Paragraph 1 of the Annex to the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, dated June 7, 2019.
(b) The transfer of loans by transferor(s) must not contravene the rights of underlying obligors and all necessary consents from obligors (including from third parties), where necessary as per the respective contracts, should have been obtained.
16. Company shall not enter into transactions involving loan participation.
17. Company, regardless of whether it is acting as a transferor or otherwise, shall not offer credit enhancements or liquidity facilities in any form in case of loan transfers.
18. 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 clearly specify the distribution of the principal and interest income from the transferred loan between the transferor and the transferee(s).
19. 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 transferee(s) shall have no recourse to the transferor for any expenses or losses linked to the transferred economic interest except those specifically permitted under these guidelines. Further, the transferor / transferee(s) shall not be constrained to obtain consent from the transferee(s) / transferor, as the case may be, when it comes to resolution or recovery in respect of the beneficial economic interest retained by or transferred to the respective entity.
20. The transferor shall have no obligation to re-acquire or fund the re-payment of the loans or any part of it or substitute loans held by the transferee(s) or provide additional loans to the transferee(s) at any time except those arising out of breach of warranties or representations made at the time of transfer. The transferor should be able to demonstrate that a notice to this effect has been given to the transferee(s) and that the transferee(s) have acknowledged the absence of such obligation.
21. Wherever security interest is held by the transferor in trust with the transferee(s) as the beneficiaries, the transferee(s) shall ensure that a mutually agreed and binding mechanism for timely invocation of such security interest, if the need arises, has been properly documented and put in place.
22. Any rescheduling, restructuring or re-negotiation of the terms of the underlying agreement/s attempted by permitted transferee(s) after the transfer of assets to the transferee(s) shall be as per the provisions of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 issued vide circular DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019.
23. When acting as a transferor, the Company shall notify RBI (Department of Supervision) of all instances where it has replaced loans transferred to a transferee or paid damages arising out of any representation or warranty.
24. MHP criteria – when acting as a transferor of loans/ portfolio other than stressed loans, the Company shall ensure compliance with the minimum holding period criteria as prescribed RBI TLE Guidelines, as amended from time to time. Currently, the regulation requires that: 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):
(a) Three months in case of loans with tenor of up to 2 years;
(b) Six months in case of loans with tenor of more than 2 years.
Provided that in case of loans where security does not exist or security cannot be registered with CERSAI, the MHP shall be calculated from the date of first repayment of the loan. Provided further that in case of transfer of project loans, the MHP shall be calculated from the date of commencement of commercial operations of the project being financed. Provided further that in case of loans acquired from other entities by a transferor, such loans cannot be transferred before completion of six months from the date on which the loan was taken into the books of the transferor. The above MHP requirement is not applicable to loans transferred by the arranging bank to other lenders under a syndication arrangement.
25. The extant instructions on outsourcing and the applicable provisions of the Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016 (as amended from time to time) shall be complied with in all cases.
26. In respect of exposures that do not meet the requirements of these directions, transferee(s) shall maintain capital charge equal to the actual exposure acquired. In such cases, the transferor shall continue to recognise the transferred loan in its entirety, as if it was not transferred at all in the first place, and the consideration received shall be recognised as an advance.
27. The transferee(s) may engage a servicing facility provider, which may also be the transferor, to administer or service the acquired exposures.
28. If a lender, including a transferor, performs the role of a servicing facility provider for the transferee(s) after the loan transfer has occurred, it should ensure that the following conditions are fulfilled:
(a) The nature, purpose, extent of the facility and all required standards of performance should be clearly specified in a written agreement.
(b) The facility is provided on an 'arm's length basis' on market terms and conditions.
(c) Payment of any fee or other income arising from the role as a servicing facility provider is not subject to deferral or waiver in a way that would directly or indirectly provide credit enhancement or liquidity facility.
(d) The duration of the facility is limited to the earliest of the dates on which:
(i) The underlying loans are completely amortised;
(ii) All claims connected with the transferee(s)’ economic interest in the underlying loans are paid out; or
(iii) The lender's obligations as the servicing facility provider are otherwise terminated.
(e) There should not be any recourse to the lender beyond the fixed contractual obligations.
(f) The transferee(s) have the clear right to select an alternative party to provide the servicing facility.
(g) The lender should be under no obligation to remit funds to the transferee(s) until it has received funds generated from the underlying loans.
(h) The lender shall hold in trust, on behalf of the transferee(s), the cash flows arising from the underlying loans and shall avoid co-mingling of these cash flows with its own cash flows. Provided that if the above conditions are not satisfied, the lender shall maintain capital on the loans transferred as if the loans in respect of which servicing facility is being provided are held by it directly on its books.
E. Specific Provisions for Transfer of Loans which are not in default
29. The provisions of this Chapter E do not apply to:
(a) Transfer of loan accounts of borrowers by a lender to other lenders, at the request/instance of borrower;
(b) Inter-bank participations covered by the circular DBOD.No.BP.BC.57/62-88 dated December 31, 1988 as amended from time to time;
(c) Sale of entire portfolio of loans consequent upon a decision to exit the line of business completely;
(d) Sale of stressed loans; and
(e) Any other arrangement/transactions, specifically exempted by the Reserve Bank of India.
30. A transferor can transfer a single loan or a part of such loan or a portfolio of such loans to permitted transferees through assignment or novation or a loan participation contract.
31. In cases where loan transfers result in a change of lender of record under a loan agreement, the transferor and transferee(s) should ensure that the existing loan agreement has suitable enabling provisions including consent by the underlying borrower that allow for such transactions by laying down the required ground rules.
32. Company shall ordinarily not enter into transactions where transferor retains an economic interest in the loans transferred.
33. There shall not be any difference in the criteria for credit underwriting applied by the transferor to exposures transferred and those held or retained on their book. To this end, similar processes for approving and, where relevant, amending, renewing and monitoring of credit facilities extended should be applied by the transferor for all the loan exposures originated by it.
34. The transfer shall be only on cash basis and the consideration shall be received not later than at the time of transfer of loans. The transfer consideration should be arrived at in a transparent manner on an arm's length basis.
35. When acting as a transferee, the Company shall monitor on an ongoing basis and in a timely manner performance information on the loans acquired, including through conducting periodic stress tests and sensitivity analyses, and take appropriate action required, if any. The action may, inter alia, include modification to exposure ceilings in respect of certain types of asset classes, change in ceilings applicable to transferor, etc. The monitoring procedure shall be at par with the procedure followed by the Company for portfolios of similar loans directly originated by the Company.
36. All relevant information and audit reports should be available for verification by the supervisors from RBI during the supervision of the transferee(s) and transferor.
37. Any loss or profit arising because of transfer of loans, which is realised, should be accounted for accordingly and reflected in the Profit & Loss account of the transferor for the accounting period during which the transfer is completed. However, unrealised profits, if any, arising out of such transfers, shall be deducted from CET 1 capital or net owned funds for meeting regulatory capital adequacy requirements till the maturity of such loans.
38. In case of transfer of a pool of loans, the transferee(s), and the transferor(s) in case of retention of economic interest, should maintain borrower-wise accounts. Thus, the exposures of the transferor(s) and the transferee(s) would be to the individual obligors in a pool of loans.
39. The capital adequacy treatment for loans acquired, in respect of the economic interest held by the transferor and transferee(s) post such transfer, will be as per the instructions applicable to loans directly originated by the lenders.
40. The transferee(s), as well as transferor(s) shall apply the extant income recognition, asset classification and provisioning as well as exposure norms, on individual obligor basis in all cases to the extent of retained economic interest.
41. For permitted transferees, the acquired loans will be carried at acquisition cost unless it is more than the outstanding principal at the time of the transfer, in which case the premium paid, should be amortised based on straight line method or effective interest rate method, as considered appropriate by the individual permitted transferee. However, the outstanding/unamortised premium need not be deducted from capital.
F. Specific Provisions for Transfer of Loans which are not in default
42. The instructions contained in this Chapter F would cover transfer of stressed loans, including transfer to ARCs.
43. The transfer of stressed loans must be done through assignment or novation only; loan participation is not permitted in the case of stressed loans.
44. All proposals for identification, sale, acquisition, transfer of stressed assets shall be dealt by the Head Office only.
45. At a minimum, all individual loans above Rs. 10,00,000/- and cumulatively above Rs. 10 crores and classified as NPA shall be reviewed by the Board at periodic intervals and a view, with documented rationale, be taken on transfer or otherwise. The loans identified for transfer shall be listed for the purpose of transfer as indicated above.
46. The valuation exercise for transfer may be carried out internally. However, when the Company is acting as a transferor and the credit exposure being transferred (without netting for provisions), singly, jointly or severally, is Rs.100 crore or more, it shall obtain two external valuation reports.
47. The discount rate used by the transferor in the internal valuation exercise shall not be less than:
(a) Weighted average cost of external capital
(b) Contracted interest rate charged
48. Transactions may be entered into on a negotiated basis. However, when negotiated on a bilateral basis, such negotiations must necessarily be followed by an auction through Swiss Challenge method if the aggregate exposure (including investment exposure) of lenders to the borrower/s whose loan is being transferred is Rs.100 crore or more.
49. When acting as a transferor, the Company shall ensure that subsequent to transfer of the stressed loans, it shall not assume any operational, legal or any other type of risks relating to the transferred loans including additional funding or commitments to the borrower / transferee(s) with reference to the loan transferred. Subsequently, fresh exposure may be taken on the borrower after a cooling period of at least 12 months from the date of such transfer.
50. The transferor(s) shall ensure that no transfer of a stressed loan is made at a contingent price whereby in the event of shortfall in the realization of the agreed price, the transferor(s) would have to bear a part of the shortfall.
51. The transferor shall transfer the stressed loans to transferee(s) other than ARCs only on cash basis. The entire transfer consideration should be received not later than at the time of transfer of loans, and the loan can be taken out of the books of the transferor only on receipt of the entire transfer consideration.
52. The transferee may treat a pool of stressed loans acquired on a portfolio basis as a single asset in their books provided that the pool consists of homogeneous personal loans. Homogeneity should be assessed on the basis of common risk drivers, including similar risk factors and risk profiles. Board of the Company shall assess the homogeneity in such cases. In all other cases, the stressed loans acquired shall be treated as separate assets for the purpose of prudential requirements such as asset classification, capital computation, income recognition etc.
53. Company, when acting as a transferee, shall assume reporting obligation, if any, to Credit Information Companies in respect of the stressed loans acquired by it.
54. If the Company has no existing exposure to the borrower whose stressed loan account is acquired, the acquired stressed loan shall be classified as “Standard” by the transferee(s). Thereafter, the asset classification status of the loan acquired, shall be determined by the record of recovery in the books of the transferee(s) with reference to cash flows estimated at the time of transfer of the loan.
55. In case the Company has existing exposure to the borrower whose stressed loan account is acquired, the asset classification of the acquired exposure shall be the same as the existing asset classification of the borrower with the transferee. This treatment shall be applicable even if such acquisition is pursuant to the transferee being a successful resolution applicant under the Insolvency and Bankruptcy Code, 2016.
56. When acting as a transferee, the Company shall make provisions for such loans as per the asset classification status in its books upon acquisition. Regardless of the asset classification, if the net present value of the cash flows estimated while acquiring the loan is less than the consideration paid for acquiring the loan, provisions shall be maintained to the extent of the difference. For this purpose, the discount factor shall be the actual interest rate charged to the borrower as per the original loan contract plus a risk premium to be determined as per the transferee’s Board approved policy considering the asset classification of the loan on the books of the transferor. The risk premium may vary basis the classification of the asset but shall be subject to a floor of 3 per cent. Provided that NBFCs preparing financial statements as per IndAS, shall continue to make provisions as required as per IndAS. However, they shall concurrently assess the provisioning required as per the methodology explained above and provisions so required shall be included in the computation of the prudential floor as prescribed under Paragraph 2 of the Annex to the circular DOR (NBFC).CC.PD.No.109/22.10.106/2019-20 dated March 13, 2020.
57. The lenders shall hold the acquired stressed loans in their books for a period of at least six months before transferring to other lenders. Lenders are generally prohibited from acquiring loans that had been transferred as stressed loans in the previous six months.
G. Additional requirements for transfer of stressed assets that are also NPA’s
58. The transferor shall continue to pursue the staff accountability aspects as per the existing instructions in respect of the NPAs transferred to other lenders.
59. In respect of NPAs acquired from other lenders, the cash flows received by the transferee from holding such asset should first be used to amortise the funded outstanding in the books of the transferee in respect of the loan till the acquisition cost is recovered. The cash flows in excess of the acquisition cost, if any, can be recognised as profit.
60. The lenders shall assign 100% risk weight to the NPAs acquired from other lenders as long as the loans are classified as ‘standard’ upon acquisition. If the loans are classified as NPA, risk weights as applicable to NPA shall be applicable.
H. Disclosures and Reporting
61. Company shall make appropriate disclosures in their financial statements, under ‘Notes to Accounts’, as per Chapter V of the RBI TLE Guidelines,