RBI opens door to direct loan purchases by stressed asset funds

The guidelines say that if lenders decide to sell their exposures to a loan account under the June 2019 restructuring guidelines, they can do so to “any class of entity.” This could include banks, non-banks, asset rebuilding companies, businesses, or other buyers.

“The guidelines allow, in spirit, all legal persons to acquire distressed assets,” said Eshwar Karra, managing director of the Kotak Special Situations Fund. “There is a benchmark to allow all entities to acquire such loans as long as they are approved by their regulator.”

In the event that the buyer of a stressed loan exposure is not a nominated bank, non-bank or ARC, lenders selling their exposures must follow certain specific guidelines, the RBI said.

  • The buyer must be incorporated in India or registered with a financial industry regulator here.

  • The buyer should not be classified as a non-performing asset by a credit institution at the time of transfer.

  • The buyer must fully replace all lenders involved in the deal.

  • Such transactions should be made in cash only.

  • The buyer should not have financed the purchase of bad debt through lenders seeking to sell their exposure.

  • Lenders looking to sell their loans are not permitted to provide loan facilities, other than working capital loans, to the company whose loan exposure is sold for a period of three years from the transfer. .

  • Likewise, for a period of three years, lenders may not grant any loan facility to the purchaser of the loan, for the specific purpose of deploying funds to the borrower whose loan account has been purchased.

Abizer Diwanji, head of financial services at EY, said the RBI should always give its explicit approval to alternative investment funds to buy bad debt.

“For now, they have asked legal persons, such as AIFs, to seek approval from their respective regulator,” Diwanji said. “After that, the final decision to authorize such transactions remains with the RBI.”

Karra of Kotak Special Situations Fund agrees.

“We offer to write to SEBI to clarify that they have no objection to funds buying bad loans from banks,” Karra said. “Once that happens, we can ask RBI to include stressed asset hedge funds in their list of authorized entities.”

Until now, banks have depended mainly on ARCs to buy bad loans from them. However, over the past three years, bad loan purchases have declined as banks insist on making deals with a higher proportion of upfront cash as CRAs have a weak loan resolution track record.

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