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Reserve Bank of India (Small Finance Banks – Transfer and Distribution of Credit Risk) Directions, 2025
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DRAFT FOR COMMENTS RBI/2025-26/-- XX, 2025 Reserve Bank of India (Small Finance Banks- Transfer and Distribution of Credit Risk) Directions, 2025 Introduction Credit Risk Transfer and Distributions are resorted to by lending institutions for multitude of reasons ranging from liquidity management and rebalancing their exposures or strategic sales. RBI has been taking several steps towards its development through Directions/Guidelines on transfer of loan exposures, inter-bank participations, consortium arrangements and others. In this regard, the Reserve Bank hereby issues a comprehensive and self-contained framework of regulatory guidelines governing different avenues of credit risk transfer and distribution. Accordingly, in exercise of powers conferred by sections 21 and 35A of the Banking Regulation Act, 1949; the Reserve Bank being satisfied that it is necessary and expedient in the public interest to do so, hereby issues these Directions hereinafter specified. A. Short title and commencement 1. These directions shall be called the Reserve Bank of India (Small Finance Banks – Transfer and Distribution of Credit Risk) Directions, 2025. 2. These Directions shall come into effect on the day it is placed on the official website of the Reserve Bank of India. B. Applicability 3. These directions shall be applicable to Small Finance Banks (hereinafter collectively referred to as 'banks' and individually as a 'bank'). Provided that Small Finance Banks are permitted for purchase of portfolios of loans classified as standard assets only from banks and Non-Banking Financial Companies (NBFCs) for the specific purpose of meeting the sub-targets within the 40% Priority Sector Lending (PSL) target as applicable to commercial banks. Provided further that Small Finance Banks are not permitted for purchase of Non-Performing Assets. Provided further that Small Finance Banks are permitted for investing in Inter Bank Participation Certificates for the specific purpose of meeting the sub-targets within the 40% PSL target as applicable to commercial banks. C. Definitions 4. The terms have been defined in the respective Parts of this Direction. 5. All other expressions, unless defined in the respective parts, shall have the same meaning as have been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank of India Act, 1934 or any statutory modification or re-enactment thereto or any other relevant regulation or as used in commercial parlance, as the case may be. PART A - TRANSFER OF LOAN EXPOSURES 6. Loan transfers are essential to the development of a credit risk market, enabling diversification of credit risk originating in the banking sector and ensure the availability of market-based credit products for a diversified set of investors having commensurate capacity and risk appetite. Chapter I- Scope and Definitions A. Applicability and Purpose 7. Banks shall acquire loans only from a transferor specified as a lender in paragraph 12(4) unless specifically permitted. 8. No bank shall undertake any loan transfers or acquisitions other than those permitted under Part A of this direction and in the manner prescribed therein. Explanation: The above proviso shall be without prejudice to the provisions of Reserve Bank of India (Small Finance Banks – Securitisation Transactions) Directions, 2025; 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. 9. The directions in Part A will be applicable to all loan transfers undertaken by the bank, including transfer of loans through novation or assignment, and loan participation. Provided that 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. 10. These directions shall apply only to SFBs as transferor(s) or transferee(s) in loan transfers, unless specifically made applicable to other categories of entities as transferee(s) as per the specific permissions as per paragraphs 57 and 61. 11. In respect of transferee(s) other than lenders mentioned in paragraph 12(4) and Asset Reconstruction Companies (ARCs), which are also financial sector entities, the prudential norms, including asset classification and provisioning post the transfer shall be as per the respective regulatory frameworks laid down by the respective financial sectoral regulators, viz., Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority, and International Financial Services Centres Authority. B. Definitions 12. For the purpose of the Part A of these Directions, following definitions shall apply: (1) “credit enhancement” means a contractual arrangement in which an entity provides some degree of added protection to other parties to a transaction so as to mitigate the credit risk of their acquired exposures; (2) “default’ means non-payment of debt (as defined under the Insolvency and Bankruptcy Code, 2016) when whole or any part or instalment of the debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be; Provided that for revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than 30 days. (3) “Economic Interest” refers to the risks and rewards that may arise out of loan exposure through the life of the loan exposure; (4) “Lenders” shall include the following set of entities, Scheduled Commercial Banks; Regional Rural Banks; Local Area Banks; Primary (Urban) Co-operative Banks; State Co-operative Banks/ Central Co-operative Banks; All India Financial Institutions (NABARD, NHB, EXIM Bank, SIDBI and NaBFID); Small Finance Banks; Non-Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs). Provided that Regional Rural Banks; Local Area Banks; and Primary (Urban) Co-operative Banks/State Co-operative Banks/ Central Co-operative Banks are permitted as only transferor(s) of stressed loans under Chapter IV of Part A of these Directions and are not permitted as transferors(s) or transferee(s) in any other type of loan transfers. (5) “loan participation” means a transaction through which the transferor transfers all or part of its economic interest in a loan exposure to transferee(s) without the actual transfer of the loan contract, and the transferee(s) fund the transferor to the extent of the economic interest transferred which may be equal to the principal, interest, fees and other payments, if any, under the transfer agreement; Provided that the transfer of economic interest under a loan participation shall only be through a contractual transfer agreement between the transferor and transferee(s) with the transferor remaining as the lender on record. Provided further that in case of loan participation, the exposure of the transferee(s) shall be to the underlying borrower and not to the transferor. Accordingly, the transferor and transferee(s) shall maintain capital according to the exposure to the underlying borrower calculated based on the economic interest held by each post such transfer. The applicable prudential norms, including the provisioning requirements, post the transfer, shall be based on the above exposure treatment and the consequent outstanding. (6) “minimum holding period (MHP)” means the minimum period for which a transferor must hold the loan exposures before the same is transferred to transferee(s); (7) “net book value (NBV)” means the funded outstanding in a loan exposure reduced by the specific provisions made against such exposure; (8) “permitted transferees” mean the lenders specified below: Scheduled Commercial Banks, All India Financial Institutions (NABARD, NHB, EXIM Bank, SIDBI and NaBFID), Small Finance Banks; and All Non-Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs). (9) “personal loans” refer to loans given to individuals and consist of (a) consumer credit, (b) education loan, (c) loans given for creation/ enhancement of immovable assets (e.g., housing, etc.), and (d) loans given for investment in financial assets (shares, debentures, etc.). Explanation: A loan shall be categorised as personal loan if it falls within the purview of the above definition, even if such loans are not explicitly classified so in any regulatory / supervisory reporting. (10) “portfolio” means a set of loan exposures transferred together at a point of time under the same transfer agreement; Provided that transfer agreements under which loans are transferred as a portfolio shall list the details of the individual loan exposures which are transferred as a portfolio. (11) “stressed loans” mean loan exposures that are classified as non-performing assets (NPA) or as special mention accounts (SMA); (12) “time of transfer” means the point at which the associated risks and rewards, to the extent of economic interest transferred and as documented in the loan participation, assignment, or novation contract, become binding on the transferor and transferee. (13) “transfer” means a transfer of economic interest in loan exposures by the transferor to the transferee(s), with or without the transfer of the underlying loan contract, in the manner permitted in Part A of these directions; Explanation: Consequently, the transferee(s) shall “acquire” the loan exposures following a loan transfer. (14) “transferee” means the entity to which the economic interest in a loan exposure is transferred under Part A of these directions; Provided that a transferee shall not be a person disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016; Provided further that in case of transfer of loan exposures of borrowers in whose accounts instances of fraud have been detected by any lender, the transferee(s) shall neither belong to the existing promoter group of such borrower nor shall be a subsidiary / associate / related party etc. (domestic as well as overseas) of any person belonging to the existing promoter group of such borrower. Explanation I: In market parlance, transferee may be alternatively referred to as the assignee under assignment transactions and participant under loan participations, wherever applicable. Explanation II: For the purpose of the second proviso above, the term ‘promoter group’ shall have the same meaning as in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018; and the term ‘related party’ shall have the same meaning as in the Insolvency and Bankruptcy Code, 2016. Explanation III: The responsibility for verifying and establishing that the transferee(s) comply with the above provisos shall be with the transferor(s). (15) “transferor” means the entity which transfers the economic interest in a loan exposure under these directions; Explanation: In market parlance, transferor may be alternatively referred to as the assignor under assignment transactions and grantor under loan participations, wherever applicable. Chapter II- General Conditions applicable for all loan transfers A. General Requirements 13. The bank shall put in place a comprehensive Board approved policy for transfer and acquisition of loan exposures under these guidelines. These guidelines must, inter alia, lay down the minimum quantitative and qualitative standards relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management, periodic Board level oversight, norms relating to the nature of the accounts that may be taken over, authority levels for sanction of takeover, reporting of takeover to higher authorities, monitoring mechanism of taken over accounts, credit audit of taken over accounts, examination of staff accountability especially in case of quick mortality of such cases after takeover, periodic review of taken over accounts at Board /Board Committee level, Top Management level, etc. Further, the policy must also 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. All transactions must meet the requirements as detailed in the policy. 14. Loan transfers should result in transfer of economic interest without being accompanied by any change in underlying terms and conditions of the loan contract. In all cases, if there are any modifications to terms and conditions of the loan contract during and after transfer (e.g. in take-out financing), the same shall be evaluated against restructuring as defined in Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025 15. In loan participation transactions, by design, the legal ownership completely remains with the transferor even after economic interest has been transferred to transferee(s). In such cases, the roles and responsibilities of the transferor and transferee(s) shall be clearly delineated contractually. 16. Lenders referred to in paragraph 12(4), regardless of whether they are transferors or otherwise, should not offer credit enhancements or liquidity facilities in any form in the case of loan transfers. 17. 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). However, it is reiterated that any retention of economic interest by the transferor shall not result in credit enhancement. 18. 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.
19. 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. 20. 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. 21. 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. 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 (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025 23. A transferor should 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. For domestic transactions, transferee(s) should ensure that the transferor has strictly adhered to the MHP criteria in respect of loans acquired by them, as prescribed in Chapter IV of Part A of these Directions. 25. The extant instructions on outsourcing and the applicable provisions of Reserve Bank of India (Small Finance Banks – Know Your Customer) Directions, 2025 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. There is no restriction on transfer of loan accounts classified as fraud by SFBs. SFBs can transfer such exposures to permitted transferees as per their board approved policies in compliance with Paragraph 54. B. Transferor as servicing facility provider 28. The transferee(s) may engage a servicing facility provider, which may also be the transferor, to administer or service the acquired exposures. 29. If a bank, including a transferor, performs the role of a servicing facility provider for the transferee(s) after the loan transfer has occurred, it shall ensure that the following conditions are fulfilled: (1) The nature, purpose, extent of the facility and all required standards of performance shall be clearly specified in a written agreement. (2) The facility is provided on an 'arm's length basis' on market terms and conditions. (3) 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. (4) The duration of the facility is limited to the earliest of the dates on which:
(5) There should not be any recourse to the lender beyond the fixed contractual obligations. (6) The transferee(s) have the clear right to select an alternative party to provide the servicing facility. (7) The bank should be under no obligation to remit funds to the transferee(s) until it has received funds generated from the underlying loans. (8) The bank 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 transferor bank 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. Chapter III-Transfer of Loans which are not in default A. General requirements 30. The provisions of this Chapter do not apply to:
31. The transactions referred to in Paragraph 30 above shall be governed by the respective regulatory frameworks. However, in all such cases, the provisions of Chapter II shall continue to apply except in cases where the respective regulatory framework provides for otherwise. 32. SFBs should formulate a board approved policy to ensure that the gap between time of transfer and due-diligence cut-off date should be minimal and no loans in default is transferred under provisions of this Chapter. 33. 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. 34. 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. 35. Transferor’s retention of economic interest, if any, in the loans transferred should be supported by legally valid documentation. A legal opinion regarding the following, at a minimum, should also be kept on record by the transferor: (1) legal validity of amount of economic interest retained by the transferor; (2) the transferor not retaining any risk and rewards associated with the loans to the extent transferred to the transferee(s); (3) the arrangement does not interfere with transferee(s)’ rights and rewards associated with the loans to the extent transferred to it, except to the extent of collaborative action contractually agreed between the transferor and the transferee(s) for enforcement of security, if any, including the scenarios in which the security interest is held by the transferor in trust for the trustees; and (4) the arrangement does not result in the transferor becoming an agent, trustee, or fiduciary of the transferee(s), except:
36. 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. 37. 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 provisions of this paragraph shall be without derogation of the provisions of paragraph 17, which pertains to retained economic interest.
38. The due diligence in respect of the loans cannot be outsourced by the transferee(s) and should be carried out by its own staff with the same rigour and as per the same policies as would have been done for originating any loan. 39. The above due diligence requirements shall be applicable at the level of each loan. In case of loans acquired as a portfolio, if a transferee is unable to perform due diligence at the individual loan level for the entire portfolio but can perform due diligence at the individual loan level for not less than one-third of the portfolio by value and number of loans in the portfolio, then due diligence may be performed at the portfolio level for the remaining, and the transferor has to retain at least 10 per cent of economic interest in the transferred loans. Explanation 1: If a transfer involves multiple transferees, the minimum retention requirement by the transferor, if any of the transferees is unable to perform due diligence at the individual loan level, shall be on the entire amount of transferred loans, including the portions transferred to transferees who are able to perform due diligence at the individual loan level. Explanation 2: The treatment in paragraph 39 is only to facilitate transfer of loans where due to operational or other constraints, the transferee does not conduct a loan level due diligence. This is without prejudice to the requirement under paragraph 48 to apply prudential norms at the individual loan level. 40. Bank needs to 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. For this purpose, transferee(s) should put in place formal policies and procedures appropriate to and commensurate with the risk profile of the loans acquired. Such procedures should be as rigorous as that followed by them for portfolios of similar loans directly originated by them. The information required for these procedures, if not collected directly by the banks and obtained from the servicing facility agent, if any, should be certified by the authorized officials of the servicing facility agent. 41. Depending upon the size of the portfolio, credit monitoring procedures may include verification of the information submitted by the servicing facility agent’s concurrent and internal auditors.
B. Minimum holding period (MHP) 42. 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):
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. Provided further that the transfer of receivables, acquired as part of ‘factoring business’ as defined under the Factoring Regulation Act, 2011, will be exempted from the above specified MHP requirement subject to fulfilment of following conditions:
43. The above MHP requirement is not applicable to loans transferred by the arranging bank to other lenders under a syndication arrangement. C. Capital Adequacy and Other prudential norms 44. 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. 45. 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. 46. 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 lender. 47. Transferee(s) may, if they so desire, have the pools of loans externally rated before acquiring so as to have a third-party view of the credit quality of the pool in addition to their own due diligence. However, such external rating shall be done ex-post the transferee(s)’ due diligence and such rating canot substitute for the due diligence that the transferee(s) are required to perform. 48. 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. 49. In case of pool of loans acquired, transferee(s) should put in place mechanisms to enable application of relevant prudential norms on individual obligor basis. Such mechanisms may also include relying on the details obtained from the servicing facility provider. However, such mechanisms must provide for adequate checks by the transferee(s)’ concurrent auditors, internal auditors and statutory auditors. All relevant information and audit reports should be available for verification by the supervisors from RBI during supervision of the transferee(s). 50. 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. 51. In cases where a transferor makes representations and warranties concerning loans transferred, the transferor will not be required to hold capital against such representations and warranties provided the following conditions are satisfied: (1) Any representation or warranty is provided only by way of a formal written agreement; (2) The representation or warranty refers to an existing state of facts that is capable of being verified by the transferor at the time the loans are transferred; (3) The representation or warranty is not open-ended and, in particular, does not relate to the future creditworthiness of the loans/underlying borrowers; (4) The exercise of a representation or warranty, if any, requiring a transferor to replace loans (or any parts thereof) transferred, on grounds covered in the representation or warranty, must be:
Provided that upon such replacement, the transferor shall apply the asset classification and provisioning norms as if the reacquired exposures had not been transferred in the first place. (5) A transferor that is required to pay damages for breach of representation or warranty can do so provided the agreement to pay damages meets the following conditions:
Chapter IV- Transfer of stressed loans A. General Requirements 52. The instructions contained in this Chapter would cover transfer of stressed loans, including transfer to ARCs. 53. The transfer of stressed loans must be done through assignment or novation only; loan participation is not permitted in the case of stressed loans. 54. The Board approved policies of banks on transfer and / or acquisition of stressed loans shall, inter alia, cover the following aspects:
55. The policy on transfer of stressed loans shall be based on the following principles:
56. Transferors should have clear policies with regard to valuation of loan exposures proposed to be transferred. The basis or the grounds which will determine the type of valuation used - internal or external - must be clearly specified in the policy. 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. 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 cost of valuation exercise, external or otherwise, shall be borne by the transferor. 57. In general, bank shall transfer stressed loans, including through bilateral sales, only to permitted transferees and ARCs. 58. The manner of transfer must be in terms of the Board approved policy of the transferor. Banks may also use e-auction platforms, wherever available, for transferring their loans. 59. 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 ₹100 crore or more. In all other cases, the bilateral negotiations shall be subject to the price discovery and value maximisation approaches adopted by the transferor as part of the Board approved policy described in Paragraph 54, which may also include Swiss Challenge method. The broad guidelines to be followed for the Swiss Challenge Method are given in paragraph 78 to paragraph 81. Provided that in case of transfer of stressed loans undertaken as a resolution plan under the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025 with the approval of signatories to the intercreditor agreement (ICA) representing 75 per cent by value of total outstanding credit facilities (fund based as well non-fund based) and 60 per cent of signatories by number, for the exit of all signatories to the ICA from the stressed loan exposure, Swiss Challenge method would be mandatory irrespective of the above exposure threshold. 60. The transferor shall ensure that subsequent to transfer of the stressed loans, they do 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 laid down in the respective Board approved policy of the transferor, which in any case, shall not be less than 12 months from the date of such transfer. 61. Notwithstanding the stipulations in paragraphs 57 to paragraph 60, if the transfer of stressed loans are undertaken as a resolution plan under the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025 resulting in an exit of all lenders specified at Paragraph 12(4) 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. (1) Explanation: The class of entities to which lenders are permitted to transfer stressed loan exposures included (a) Scheduled Commercial Banks including Small Finance Banks; (b) AIFIs, (c) All NBFCs including HFCs; (d) ARCs registered with the Reserve Bank under Section 3 of the SARFESAI Act 2002; (e) A company, as defined in sub-section (20) of Section 2 of the Companies Act, 2013 other than a financial service provider as defined in sub-section (17) of Section 3 of the Insolvency and Bankruptcy Code, 2016. Acquisition of loan exposures by such companies shall be subject to the relevant provisions of the Companies Act, 2013. (2) The class of entities will be updated as and when any new class of entities is permitted by the respective financial sector regulators. (3) In case such transferee(s) are neither ARC nor permitted transferee, the transfer shall be additionally subject to the following conditions: (i) The transferee entity should be incorporated in India or registered with a financial sector regulator in India (Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority, and International Financial Services Centers Authority).
(iv) The lenders specified at Paragraph 12(4) 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 banks which are not transferors. (v) Further, for at least three years from the date of such transfer, the lenders specified at Paragraph 12(4) should not take any credit/investment exposure to the transferee(s) for deployment, either directly or indirectly, into the operations of the borrower. For this purpose, borrower shall mean the legal entities to which the transferor(s) had exposure which was transferred to the transferee(s) as a part of the resolution plan, and may include, but is not limited to, a special purpose vehicle having a legal-entity status set up for a project. Explanation: The entity permitted to take on loan exposures by its statutory or regulatory framework, as referred to in this paragraph, would have to be separately enabled by its regulatory or statutory framework for taking on loan exposures, and then listed in the class of entities by the Reserve Bank. The above paragraph merely permits the lender to transfer stressed loans under a resolution plan to such entities which are already permitted to take on loan exposures. The respective financial sector regulators shall put in place a framework for this purpose in consultation with the Reserve Bank. 62. The transferor(s) must provide adequate time for due diligence by prospective acquirers, which may vary as per the size of the loan. 63. The loan transfer agreement shall clearly specify that in the event an ICA is required to be signed in terms of the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025 the transferee shall sign the ICA as and when required. 64. 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. 65. 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. If the transfer to transferee(s) other than ARCs is at a price below the net NBV at the time of transfer, the shortfall shall be debited to the profit and loss account of the year in which transfer has taken place. If the sale consideration is for a value higher than the NBV at the time of transfer, the excess provisions may be reversed. 66. In the case of ARC, the asset classification of stressed loans acquired by it and the associated provisions to be maintained shall be continued to be guided by the extant instructions as applicable to them in this regard. B. Additional requirements for transfer of NPAs 67. The transferor shall continue to pursue the staff accountability aspects as per the existing instructions in respect of the NPAs transferred to other lenders. C. Transfer of loans to Asset Reconstruction Companies 68. Subject to the provisions of the Reserve Bank of India (Asset Reconstruction Companies) Directions, 2025 all stressed loans which are in default in the books of the transferors are permitted to be transferred to ARCs. This shall include loan exposures classified as fraud as on the date of transfer provided that the responsibilities of the transferor with respect to continuous reporting, monitoring, filing of complaints with law enforcement agencies and proceedings related to such complaints shall also be transferred to the ARC. The transfer of such loan exposures to an ARC, however, does not absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds. 69. In case of specific stressed loans, where it is considered necessary, transferor(s) shall be free to enter into agreement with the ARC to share, in an agreed proportion, any surplus realised by the ARC from the concerned stressed loan. In such cases, the terms of transfer should provide for a report from the ARC to the transferor(s) on the value realised from the loan. Transferor(s) shall not account for the profit until it has materialised. 70. When the stressed loan is transferred to ARC at a price below the NBV at the time of transfer, bank shall debit the shortfall to the profit and loss account for the year in which the transfer has taken place. A bank is permitted to use countercyclical or floating provisions for meeting any shortfall on transfer of stressed loan when the transfer is at a price below the NBV. 71. On the other hand, when the stressed loan is transferred to an ARC for a value higher than the NBV at the time of transfer, bank shall reverse the excess provision on transfer to the profit and loss account in the year the amounts are received and only when the sum of cash received by way of initial consideration and / or redemption or transfer of Security Receipts (SR) / Pass Through Certificates (PTCs)/ other securities issued by ARCs is higher than the NBV of the loan at the time of transfer. Further, such reversal shall be limited to the extent to which cash received exceeds the NBV of the loan at the time of transfer. (1) Notwithstanding the provisions contained in paragraph 71, the bank can reverse the entire excess provision [viz. sale consideration (-) NBV] to the Profit and Loss Account in the year of transfer if the sale consideration comprises only of cash and SRs guaranteed by the Government of India. Provided that, the non-cash component of the excess provision [viz. excess provision (-) cash received at the time of transfer] shall be deducted from CET 1 capital, and no dividends shall be paid out of this component. 72. Investments by lenders in SRs / PTCs / other securities issued by ARCs shall be valued periodically by reckoning the Net Asset Value (NAV) declared by the ARC based on the recovery ratings received for such instruments. Provided that when transferors invest in the SRs/PTCs issued by ARCs in respect of the stressed loans transferred by them to the ARC, the transferors shall carry the investment in their books on an ongoing basis, until its transfer or realization, at lower of the redemption value of SRs arrived based on the NAV as above, and the NBV of the transferred stressed loan at the time of transfer. 73. 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:
74. (1) Notwithstanding the provisions contained in paragraph 73, or the proviso to paragraph 72, SRs guaranteed by the Government of India shall be valued periodically by reckoning the Net Asset Value (NAV) declared by the ARC based on the recovery ratings received for such instruments. (2) However, any unrealized gain recognized in the Profit and Loss Account on account of fair valuation of such investments shall be deducted from CET 1 capital, and no dividends shall be paid out of such unrealized gains. (3) Any SRs outstanding after the final settlement of the government guarantee or the expiry of the guarantee period, whichever is earlier, shall be valued at ₹1. (4) In the event of the SRs being converted to any other form of instruments as part of resolution, then the valuation and provisioning thereof, for such instruments shall be governed by the provisions as laid down under Master Direction on Resolution of Stressed Assets. 75. SRs/PTCs which are not redeemed as at the end of the resolution period (i.e., five years or eight years as the case may be) shall be treated as loss asset in books of the lender and fully provided for. 76. The valuation, classification and other norms applicable to investment in non-SLR instruments prescribed by RBI from time to time shall be applicable to lender’s investment in debentures/ bonds/ SRs /PTCs issued by ARC. However, if any of the above instruments issued by ARC is limited to the actual realisation of the financial assets assigned to the instruments in the concerned scheme, the bank shall reckon the NAV obtained from ARC from time to time, for valuation of such investments. 77. Where stressed loans are taken over by ARCs as agents for recovery in exchange for a fee, the loans will not be removed from the books of the transferors but realisations as and when received shall be credited to the loan accounts. The transferors shall continue making provisions for the loan in the normal course. C. Price Discovery through Swiss Challenge Method 78. Subject to the requirements under Paragraph 54, the bank shall put in place a board approved policy on adoption of Swiss Challenge Method for transfer of their stressed loans.
79. In case of transfer of stressed loans undertaken as a resolution plan under the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025 with the approval of signatories to the ICA, the minimum mark-up over the base-bid required for the challenger bid to be considered by the lenders specified at paragraph 12(4) above, shall be decided with the approval of signatories to the ICA representing 75 per cent by value of total outstanding credit facilities (fund based as well non-fund based) and 60 per cent of signatories by number. The above decision will prevail over any individual policy of any of the signatories to the ICA. 80. On an ongoing basis, the bank should identify the stressed loans which will be offered for transfer and an authenticated list of such loans shall be maintained by the lenders. The list may, at the discretion of the lender, be disclosed to prospective bidder on entering into confidentiality agreement. 81. The broad contours of the Swiss Challenge Method are as under: (1) A prospective transferee interested in acquiring a specific stressed loan may offer a bid to the bank(s), which shall be termed as the base-bid. (2) The bank(s) shall then publicly call for counter bids from other prospective buyers, on comparable terms, by disclosing the essential elements of the base-bid and also clearly specifying the minimum mark-up (as specified in Paragraph 78) that would be acceptable. (3) If no counter bid crossed the minimum mark-up specified in the invitation, the base-bid becomes the winning bid. (4) If counter bid(s) cross the minimum mark-up specified in the invitation, the highest counter bid becomes the challenger bid. The prospective transferee who provided the base-bid is then invited to match the challenger bid. If the prospective transferee who provided the base-bid either matches the challenger bid or bids higher than the challenger bid, such bid shall become the winning bid; else, the challenger bid shall be the winning bid. (5) The bank(s) will then have the following two options: (i) Transfer the loan to winning bidder, as determined above; (ii) If the bank decides not to transfer the loan to winning bidder, the bank will be required to make immediate provision on the account to the extent of the higher of the following:
C. Disclosures and Reporting 82. The banks should be guided by Reserve Bank of India (Small Finance Banks – Financial Statements: Presentation and Disclosures) Directions, 2025 for all disclosure related requirements. 83. Banks shall report each loan transfer transaction undertaken under these directions to a trade reporting platform as notified by the Reserve Bank. The detailed instructions in this regard will be issued separately. In anticipation of the same, bank shall maintain a database of loan transfer transactions with adequate MIS concerning each transaction till the reporting platform is notified and the related instructions are issued. PART B - OTHER TYPES OF CREDIT RISK TRANSFER Chapter I- Inter-bankParticipations 84. There shall be two categories of Participations namely Inter-Bank Participations with Risk Sharing and Inter-Bank Participations without Risk Sharing. 85. The provisions contained in paragraph 13 to 27, relating to General Conditions applicable for all loan transfers shall apply to this chapter on Inter Bank Participations. A. Inter-BankParticipations with Risk Sharing 86. Selection of Accounts: A bank will allot such participations only in respect of advances, which are not in default. The aggregate amount of such Participations in any account should not exceed 40 per cent of the outstanding in the account at the time of issue. Further, during the currency of the Participations the aggregate amount of Participations should be covered by the outstanding balance in the account. In case the outstanding balance falls short of the participations outstanding, the issuing bank will reduce the Participations to the extent necessary and if need be, issue Participations for smaller amounts. 87. Period of Participation: The minimum period of such a Participation shall be 91 days, while the maximum period shall be 180 days. 88. Rate of Interest: The rate of interest on Participations would be left free to be determined between the issuing bank and the participating bank. 89. Transferability: Participations shall not be transferable. 90. Documentation: A bank should subscribe to the "uniform code for Participations" prepared by IBA which will spell out clearly their inter-se rights and obligations in relation to the securities covered by the advances in question. 91. Risk: The risk would be deemed to have crystallised when the issuing bank recalls the advances and stops operations in the relative account. In such a case the issuing bank would give due notice to the participating bank intimating the default. 92. Repayment: The issuing bank will normally repay the amount of Participations together with interest to the participant bank on the date of maturity, excepting when the risk has materialised. In cases where risk has materialised the issuing bank will take necessary action, in consultation with the participating bank and share the recoveries proportionately. 93. Accounting: In the case of the issuing bank, the aggregate amount of Participations would be reduced from the aggregate advances outstanding. Such transactions will not be reflected in the individual borrower's accounts but will be only netted out in the financial reporting. The participating bank shall show the aggregate amount of such Participations as part of its advances. The issuing bank will maintain a record of full particulars of such Participations. There shall be no privity of contract between the borrower and the participating bank and to avoid any difficulty, bank will incorporate in the cash credit agreement of the borrowers an appropriate clause permitting the lending bank to shift a part of the advance to any bank, without notice to the borrowers, by way of Participations. The agreement may also provide that in the event of issue of Participations the issuing bank would continue to represent the participating bank in protecting the latter's interests. B. Inter-Bank Participations without risk sharing 94. Period of Participation: The tenure of such Participations shall not exceed 90 days. 95. Rate of Interest: The rate of interest would be determined by the two concerned banks. 96. Transferability: Participation shall not be transferable. 97. Repayment: On the date of maturity, the issuing bank will pay the amount of Participations with interest to the participating bank irrespective of the default if any in the advance in question. 98. Accounting: The issuing bank will show the amount of Participations as borrowing while the participating bank shall show the same under Advances to bank i.e. due from banks. The Participations would be treated as part of the net Demand and Time Liabilities and net bank balances for purposes of statutory reserve requirements. 99. Reporting of Data: As a result of outstanding Participations being treated as borrowings, the issuing bank should report such borrowings in the fortnightly return under Section 42(2) of the Reserve Bank of India Act, 1934. The same shall be done by including the amount of Participations, by the issuing bank under 'Borrowings from banks' i.e. item l(b) in Form 'A'. The participating bank should include the amount of Participations taken in advances to banks under item III(c) in Form 'A'. The amount of Participations so included in the relative items of Form 'A' should be clearly indicated as a foot-note to the return, showing separately also Participations on risk sharing basis. Chapter II- Transfer of Borrower Accounts and Take-out Financing 100. The provisions contained in paragraph 13 to 27 relating to General Conditions applicable for all loan transfers shall apply to this chapter on Transfer of Borrower accounts and Take-out Financing. A. Transfer of Borrower Accounts: 101. The bank is advised that before taking over an account, the transferee bank should obtain necessary credit information from the transferor bank as per the format prescribed in Annex I. This would enable the transferee bank to be fully aware of the irregularities, if any, existing in the borrower's account(s) with the transferor bank. The transferor bank, on receipt of a request from the transferee bank, should share necessary credit information as per the prescribed format at the earliest. B. Take-out financing 102. Take-out financing structure is essentially a mechanism designed to enable banks to avoid asset-liability maturity mismatches that may arise out of extending long tenor loans to infrastructure projects. Under the arrangements, banks financing the infrastructure projects will have an agreement with financial Institutions for transferring to the latter the outstandings in their books on a pre-determined basis. The banks may also be guided by the instructions regarding take-out finance contained in Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025. Chapter III- Lending under Consortium / Multiple Banking Arrangements – Exchange of Information 103. The banks may evolve appropriate mechanism for adopting sole bank, multiple bank, consortium or syndication approach, by framing necessary ground rules on operational aspects. Banks shall strengthen its information back-up about the borrowers enjoying credit facilities from multiple lenders as under:
104. Further, the consortium leader / bank having the largest exposure shall have the lead role in monitoring the unhedged foreign exchange exposure of entities. PART C: REPEAL AND OTHER PROVISIONS A. Repeal and saving 105. With the issue of these Directions, the existing Directions, instructions, and guidelines relating to Transfer and Distribution of Credit Risk as applicable to Small Finance Banks stands repealed, as communicated vide notification dated XX, 2025. The Directions, instructions and guidelines repealed prior to the issuance shall continue to remain repealed. 106. Notwithstanding such repeal, any action taken or purported to have been taken, or initiated under the repealed Directions, instructions, or guidelines shall continue to be governed by the provisions thereof. All approvals or acknowledgments granted under these repealed lists shall be deemed as governed by these Directions. B. Application of other laws not barred 107. The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations, or directions, for the time being in force. C. Interpretations 108. For the purpose of giving effect to the provisions of these Directions or in order to remove any difficulties in the application or interpretation of the provisions of these Directions, the RBI may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by the RBI shall be final and binding. |
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