To Market, to Market With Bank Loans

The RBI’s Master Directions for an active secondary market for bank loans seek to boost liquidity and risk management for banks, and transparency and credit availability for borrowers. An active secondary market for corporate loans should promote an active corporate bond market, and step up efficient, arm’s-length finance.

A loan transfer (read: loan participation) is defined as a transaction in which a transferor transfers all or part of its economic interest in a loan to one or more transferees, without transfer of the loan contract. And the transferee has to fund the transferor to the extent of the economic interest transferred, amounting to the principal, interest, fees and other payments, if any, as per agreement.

A minimum holding period (MHP) of 3-6 months, depending on tenor of loan, is prescribed for the transferor. The transferee(s) may get the loan pools rated for credit quality, but such rating cannot substitute for due diligence on the latter’s part. So, the norms call for skin in the game, which seems unexceptionable. Disclosure is mandated on loan valuation and the discount rate used by the transferor, which may be linked to cost of equity, average cost of funds, or opportunity cost or other criteria, with the contracted interest rate charged being the floor. For loan transfers of `100 crore or more, two external valuation reports are required.

Both performing and non-performing assets may be transferred, but the rules stipulate that stressed loans can only be transferred to permitted transferees and asset reconstruction companies via a bidding process termed the Swiss Challenge method — the initial bid is made public, others bid against it and the original bidder has a chance to better those bids.


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