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Wednesday, Apr 13, 2005

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RBI draft guidelines — Credit risk on banks purchasing NPAs

Our Bureau

Mumbai , April 12

BANKS will be allowed to buy or sell non-performing financial assets from or to other banks only on a `without recourse' basis, according to the Reserve Bank of India's draft guidelines on the purchase or sale of non-performing assets (NPAs). This implies that the entire credit risk associated with NPAs should be transferred to the purchasing bank.

The selling bank should ensure that after the sale of the financial assets, the asset is taken off the books of the bank. After the sale, there should not be any known liability devolving on the selling bank.

Subsequent to the sale of NPAs to other banks, the selling bank should not have any involvement with the assets sold and must not assume operational, legal or any other type of risks relating to the assets sold.

Consequently, the specific financial asset should not enjoy the support of credit enhancements and liquidity facilities in any form or manner, the RBI has emphasised.

Each bank should make its own assessment of the value offered by the purchasing bank for the financial asset and decide whether to accept or reject the offer.

Under no circumstances can a sale to other banks be made at a contingent price, whereby in the event of shortfall in the realisation by the purchasing bank, the selling bank would have to bear a part of the shortfall.

A non-performing asset in the books of a bank shall be eligible for sale to other banks only if it has remained so for at least two years in the books of the selling bank. Banks may sell non-performing financial assets to other banks only on cash basis.

Banks purchasing or selling non-performing financial assets should ensure that the purchase or sale is conducted in accordance with a policy approved by the board.

While laying down the policy, the bank board shall satisfy itself that the bank has adequate skills to purchase non-performing financial assets and deal with them in an efficient manner, which will result in value addition to the bank.

The board should also ensure that appropriate systems and procedures are in place to address the risks that a purchasing bank would assume while engaging in this activity.

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