what is direct assignment of loans

• Bankruptcy Basics
• Chapter 11 Bankruptcy
• Chapter 13 Bankruptcy
• Chapter 7 Bankruptcy
• Debt Collectors and Consumer Rights
• Divorce and Bankruptcy
• Going to Court
• Property & Exemptions
• Student Loans
• Taxes and Bankruptcy
• Wage Garnishment

Understanding the Assignment of Mortgages: What You Need To Know

3 minute read • Upsolve is a nonprofit that helps you get out of debt with education and free debt relief tools, like our bankruptcy filing tool.  Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card.  Explore our free tool

A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

Upsolve Member Experiences

Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

Continue reading and learning!

It's easy to get debt help

Choose one of the options below to get assistance with your debt:

Considering Bankruptcy?

Our free tool has helped 13,480+ families file bankruptcy on their own. We're funded by Harvard University and will never ask you for a credit card or payment.

Private Attorney

Get a free evaluation from an independent law firm.

Learning Center

Research and understand your options with our articles and guides.

Already an Upsolve user?

Bankruptcy Basics ➜

• What Is Bankruptcy?
• Every Type of Bankruptcy Explained
• How To File Bankruptcy for Free: A 10-Step Guide
• Can I File for Bankruptcy Online?

Chapter 7 Bankruptcy ➜

• What Are the Pros and Cons of Filing Chapter 7 Bankruptcy?
• What Is Chapter 7 Bankruptcy & When Should I File?
• Chapter 7 Means Test Calculator

Wage Garnishment ➜

• How To Stop Wage Garnishment Immediately

Property & Exemptions ➜

• What Are Bankruptcy Exemptions?
• Chapter 7 Bankruptcy: What Can You Keep?
• Yes! You Can Get a Mortgage After Bankruptcy
• How Long After Filing Bankruptcy Can I Buy a House?
• Can I Keep My Car If I File Chapter 7 Bankruptcy?
• Can I Buy a Car After Bankruptcy?
• Should I File for Bankruptcy for Credit Card Debt?
• How Much Debt Do I Need To File for Chapter 7 Bankruptcy?
• Can I Get Rid of my Medical Bills in Bankruptcy?

Student Loans ➜

• Can You File Bankruptcy on Student Loans?
• Can I Discharge Private Student Loans in Bankruptcy?
• Navigating Financial Aid During and After Bankruptcy: A Step-by-Step Guide
• Filing Bankruptcy to Deal With Your Student Loan Debt? Here Are 3 Things You Should Know!

Debt Collectors and Consumer Rights ➜

• 3 Steps To Take if a Debt Collector Sues You
• How To Deal With Debt Collectors (When You Can’t Pay)

Taxes and Bankruptcy ➜

• What Happens to My IRS Tax Debt if I File Bankruptcy?
• What Happens to Your Tax Refund in Bankruptcy

Chapter 13 Bankruptcy ➜

• Chapter 7 vs. Chapter 13 Bankruptcy: What’s the Difference?
• Why is Chapter 13 Probably A Bad Idea?
• How To File Chapter 13 Bankruptcy: A Step-by-Step Guide
• What Happens When a Chapter 13 Case Is Dismissed?

Going to Court ➜

• Do You Have to Go To Court to File Bankruptcy?
• Telephonic Hearings in Bankruptcy Court

Divorce and Bankruptcy ➜

• How to File Bankruptcy After a Divorce
• Chapter 13 and Divorce

Chapter 11 Bankruptcy ➜

• Chapter 7 vs. Chapter 11 Bankruptcy
• Reorganizing Your Debt? Chapter 11 or Chapter 13 Bankruptcy Can Help!

State Guides ➜

• Connecticut
• District Of Columbia
• Massachusetts
• Mississippi
• New Hampshire
• North Carolina
• North Dakota
• Pennsylvania
• Rhode Island
• South Carolina
• South Dakota
• West Virginia

Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families resolve their debt and fix their credit using free software tools. Our team includes debt experts and engineers who care deeply about making the financial system accessible to everyone. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations.

To learn more, read why we started Upsolve in 2016, our reviews from past users, and our press coverage from places like the New York Times and Wall Street Journal.

• Notifications

Master Circulars

1. 1 Asset Liability Management (ALM) System for NBFCs - Guidelines

It was decided to introduce an ALM System for the Non-Banking Financial Companies (NBFCs), as part of their overall system for effective risk management in their various portfolios. The abovementioned guidelines would be applicable to all the NBFCs irrespective of whether they are accepting / holding public deposits or not. However to begin with, NBFCs meeting the criteria of asset base of Rs.100 crore (whether accepting / holding public deposits or not) or holding public deposits of Rs. 20 crore or more (irrespective of their asset size) as per their audited balance sheet as of 31 March 2001 would be required to put in place the ALM System.

A system of half yearly reporting was put in place in this regard and the first Asset Liability Management return as on 30 September 2002 was to be submitted to RBI by only those NBFCs which are holding public deposits within a month of close of the relevant half year i.e., before 31 October 2002 and continue thereafter in similar manner. The half yearly returns would comprise of three parts:

(i) Statement of structural liquidity in format ALM;

(ii) Statement of short term dynamic liquidity in format ALM; and

(iii) Statement of Interest Rate Sensitivity in format ALM.

In the case of companies not holding public deposits, separate supervisory arrangements would be made and advised in due course of time.

2. 2 Nomination rules under Section 45QB of RBI Act for NBFC Deposits

In terms of Section 45QB of the RBI Act, the depositor/s of NBFCs may nominate, in the manner prescribed under the rules made by the Central Government under Section 45ZA of the Banking Regulation Act, 1949 (B.R.Act) one person to whom, in the event of death of the depositor/s, the amount of deposit may be returned by the NBFC. It has been decided in consultation with the Government of India, that the Banking Companies (Nomination) Rules, 1985 are the relevant rules made under Section 45ZA of the B. R. Act. A copy of the rules is enclosed. Accordingly, NBFCs may accept nominations made by the depositors in the form similar to that specified under the said rules.

3. 3 Safe Custody of Liquid Assets / Collection of Interest on SLR Securities

NBFCs including RNBCs are required to maintain liquid assets in the form of Government securities / guaranteed bonds as per the provisions of Section 45-IB of the RBI Act and lodge such securities in a Constituents' Subsidiary General Ledger (CSGL) Account with a scheduled commercial bank (SCB) / Stock Holding Corporation of India Ltd., (SHCIL) or in a demat account with a depository through a depository participant (DP) registered with Securities & Exchange Board of India (SEBI) or with a branch of SCB to the extent such securities are yet to be dematerialised.

In order to protect the interest of depositors, an exclusive CSGL or demat account to hold Government securities shall be maintained for securities held for the purpose of compliance with Section 45-IB of the RBI Act. This account should be operated only for purchase or sale of securities due to increase or decrease in the quantum of public deposits or withdrawal of securities for encashment on maturity or for repayment to depositors in special circumstances, and not be used to undertake repo or other transactions.

In case an NBFC (including RNBC) deals in the government securities in a manner other than that permitted above, another CSGL account may be opened for this purpose.

It is also observed that some of the NBFCs have either not dematerialised the government securities or have dematerialized but failed to report the same to the RBI. For this purpose the quarterly liquid asset return in the reporting formats of NBS 3 and NBS 3A has been amended to include the information about the demat accounts, which will ensure that the information in this regard is not omitted by NBFCs.

It may be possible that there may be a few Government securities / Government guaranteed bonds that have not been dematerialized and are held in physical form which for the purpose of collection of interest are withdrawn from the safe custody with their designated bankers and re-deposited with the banks after collection of interest. To avoid the process of withdrawal and re-depositing the same it has now been decided that NBFCs / RNBCs shall authorize the designated banks as agents for collection of interest on due dates on these securities held in physical form and lodged for safe custody. NBFCs / RNBCs may approach their designated banker and exercise a Power of Attorney in favour of the designated bank to enable it to collect interest on the securities / guaranteed bonds held in physical form on the due date.

4. 4 Non- Reckoning Fixed Deposits with Banks as Financial Assets

It was clarified, that the Reserve Bank issues a Certificate of Registration for the specific purpose of conducting NBFI activities. Investments in fixed deposits cannot be treated as financial assets and receipt of interest income on fixed deposits with banks cannot be treated as income from financial assets as these are not covered under the activities mentioned in the definition of “financial Institution” in Section 45I(c) of the RBI Act 1934. Besides, bank deposits constitute near money and can be used only for temporary parking of idle funds, and/or in the above cases, till commencement of NBFI business.

In addition, the NBFC which is in receipt of a CoR from the Bank must necessarily commence NBFC business within six months of obtaining CoR. If the business of NBFC is not commenced by the company within the period of six months from the date of issue of CoR, the CoR will stand withdrawn automatically. Further, there can be no change in ownership of the NBFC prior to commencement of business and regularization of its CoR.

5. 5 Operative instructions relating to relaxation / modification in Ready Forward Contracts, Settlement of Government Securities Transactions and Sale of securities allotted in Primary Issues

All NBFCs / RNBCs are instructed to follow the guidelines on transactions in Government Securities as given in the circular IDMD.PDRS.05/10.02.01/2003-04 dated March 29, 2004 and IDMD.PDRS.4777 , 4779 & 4783/10.02.01/2004-05 all dated May 11, 2005 as amended from time to time. In cases of doubt they may refer to IDMD.

6. 6 FIMMDA Reporting Platform for Corporate Bond Transactions

SEBI has permitted FIMMDA to set up its reporting platform for corporate bonds. It has also been mandated to aggregate the trades reported on its platform as well as those reported on BSE and NSE with appropriate value addition. All NBFCs would be required to report their secondary market transactions in corporate bonds done in OTC market, on FIMMDA's reporting platform with effect from September 1, 2007. Detailed operational guidelines in this regard would be issued by FIMMDA. In the meanwhile, the NBFCs may approach FIMMDA directly for participating in the mock reporting sessions.

7. Need for public notice before Closure of the Branch / Office by any NBFC

7 NBFCs should give at least three months public notice prior to the date of closure of any of its branches / offices in, at least, one leading national news paper and a leading local (covering the place of branch / office) vernacular language newspaper indicating therein the purpose and arrangements being made to service the depositors etc.

8. Cover for public deposits - creation of floating charge on Liquid Assets by deposit taking NBFCs

NBFCs raise funds for their operations from various sources like public deposits, bank borrowings, inter-corporate deposits, secured / unsecured debentures, etc.

8 In order to ensure protection of depositors interest, NBFCs should ensure that at all times there is full cover available for public deposits accepted by them. While calculating this cover the value of all debentures (secured and unsecured) and outside liabilities other than the aggregate liabilities to depositors may be deducted from the total assets. Further, the assets should be evaluated at their book value or realizable / market value whichever is lower for this purpose. It shall be incumbent upon the NBFC concerned to inform the Regional Office of the Reserve Bank in case the asset cover calculated as above falls short of the liability on account of public deposits. NBFCs accepting / holding public deposits were directed to create a floating charge on the statutory liquid assets invested in terms of Section 45-IB of the RBI Act, 1934, in favour of their depositors. Such charge should be duly registered in accordance with the requirements of the Companies Act, 1956.

9 In view of the practical difficulties expressed by the NBFCs in creating charge on the statutory liquid assets in favour of large number of depositors, it was subsequently decided that NBFCs accepting / holding public deposits may create the floating charge on the statutory liquid assets maintained in terms of Section 45-IB of the RBI Act, 1934 and notifications issued by the Bank from time to time, in favour of their depositors through the mechanism of 'Trust Deed'.

9. Unsolicited Commercial Communications - National Do Not Call Registry

10 It is an emerging practice in India to engage agents / outsource business operations for the purpose of soliciting or promoting any commercial transactions using telecommunication mode. There is a need to protect the right to privacy of the members of public and to curb the complaints relating to unsolicited commercial communications being received by customers / non-customers, as part of best business practices.

Telecom Regulatory Authority of India (TRAI) has framed the Telecom Unsolicited Commercial Communications (UCC) Regulations for curbing UCC. Further, the Department of Telecommunications (DoT) has issued relevant guidelines for telemarketers along with the registration procedure on June 6, 2007. These guidelines have made it mandatory for telemarketers to register themselves with DoT or any other agency authorized by DoT and also specified that the telemarketers shall comply with the Guidelines and Orders / Directions issued by DoT and Orders / Directions / Regulations issued by Telecom Regulatory Authority of India (TRAI) on Unsolicited Commercial Communications(UCC). The detailed procedure in this regard is also available on TRAI's website ( www.trai.gov.in ).

NBFCs are therefore advised

(i) not to engage Telemarketers (DSAs / DMAs) who do not have any valid registration certificate from DoT, Govt of India, as telemarketers; 11 NBFCs should engage only those telemarketers who are registered in terms of the guidelines issued by TRAI, from time to time, for all their promotional/ telemarketing activities.

(ii) to furnish the list of Telemarketers (DSAs/DMAs) engaged by them along with the registered telephone numbers being used by them for making telemarketing calls to TRAI; and

(iii) to ensure that all agents presently engaged by them register themselves with DoT as telemarketers.

10. 12 Investment through Alternative Investment Funds - Clarification on Calculation of NOF of an NBFC

It was  observed in certain cases that an NBFC while arriving at the NOF figure as in terms of  Section  45 IA of the RBI Act, 1934, did not reckon its investment in group companies on the ground that investments in the group companies were made by the Venture Capital Fund (VCF) sponsored by the NBFC, although, in term, the contribution to the funds held by the VCF had come primarily from the NBFC itself.

A  VCF or any such Alternative Investment Fund (AIF) 13 means a pool of capital by investors and the investment made by such an AIF is done on behalf of the investors. Accordingly, it is clarified that while arriving at the NOF figure, investment made by an NBFC in entities of the same group concerns shall be treated alike, whether the investment is made directly or through an AIF / VCF, and when the funds in the VCF have come from the NBFC to the extent of 50% or more; or where the beneficial owner, in the case of Trusts is the NBFC, if 50% of the funds in the Trusts are from the concerned NBFC. For this purpose, "beneficial ownership" would mean holding the power to make or influence decisions in the Trust and being the recipient of benefits arising out of the activities of the Trust. In other words, in arriving at the NOF, the substance would take precedence over form. NBFCs were advised to keep this principle in mind, always, while calculating their NOF.

11. 14 Accounting for taxes on income - Accounting Standard 22 - Treatment of deferred tax assets (DTA) and deferred tax liabilities (DTL) for computation of capital

As creation of DTA or DTL would give rise to certain issues impacting the balance sheet of the company, it is clarified that the regulatory treatment to be given to these issues are as under:

- The balance in DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital.

- DTA will be treated as an intangible asset and should be deducted from Tier I Capital.

- NBFCs may keep the above clarifications in mind for all regulatory requirements including computation of CRAR and ensure compliance with effect from the accounting year ending March 31, 2009.

In this connection it is further clarified that

DTL created by debit to opening balance of Revenue Reserves or to Profit and Loss Account for the current year should be included under 'others' of "Other Liabilities and Provisions."

DTA created by credit to opening balance of Revenue Reserves or to Profit and Loss account for the current year should be included under item 'others' of "Other Assets."

Intangible assets and losses in the current period and those brought forward from previous periods should be deducted from Tier I capital.

DTA computed as under should be deducted from Tier I capital:

(i) DTA associated with accumulated losses; and

(ii) The DTA (excluding DTA associated with accumulated losses) net of DTL. Where the DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (i) nor added to Tier I capital."

12. 15 Introduction of Interest Rate Futures – NBFCs

NBFCs can participate in the designated interest rate futures exchanges recognized by SEBI, as clients, subject to RBI / SEBI guidelines in the matter, for the purpose of hedging their underlying exposures. NBFCs participating in IRF exchanges may submit the data in this regard half yearly, in the prescribed format, to the Regional office of the Department of Non-Banking Supervision in whose jurisdiction their company is registered, within a period of one month from the close of the half year.

13. 16 Finance for Housing Projects - Incorporating clause in the terms and conditions to disclose in pamphlets / brochures / advertisements, information regarding mortgage of property to the NBFC

While granting finance to housing / development projects, NBFCs also should stipulate as a part of the terms and conditions that :

(i) the builder / developer / owner / company would disclose in the Pamphlets / Brochures / advertisements etc., the name(s) of the entity to which the property is mortgaged.

(ii) the builder / developer / owner / company should indicate in the pamphlets / brochures, that they would provide No Objection Certificate (NOC) / permission of the mortgagee entity for sale of flats / property, if required.

NBFCs should ensure compliance with the above stipulations and funds should not be released unless the builder / developer / owner / company fulfills the above requirements.

14. 17 Loan facilities to the physically / visually challenged by NBFCs

NBFCs shall not discriminate in extending products and facilities including loan facilities to the physically / visually challenged applicants on grounds of disability. NBFCs were also instructed to advise their branches to render all possible assistance to such persons for availing of the various business facilities. 18 NBFCs should include a suitable module containing the rights of persons with disabilities guaranteed to them by the law and international conventions, in all the training programmes conducted for their employees at all levels. Further, NBFCs may ensure redressal of grievances of persons with disabilities under the Grievance Redressal Mechanism already set up by them.

15. 19 Participation in Currency Futures

All NBFCs excluding RNBCs are allowed to participate in the designated currency futures exchanges recognized by SEBI as clients, subject to RBI (Foreign Exchange Department) guidelines in the matter, only for the purpose of hedging their underlying forex exposures. NBFCs were advised to make appropriate regarding transactions undertaken in the Balance sheet.

16. 20 Submission of data to Credit Information Companies - Format of data to be submitted by Credit Institutions

In terms of Section 2(f)(ii) of the Credit Information Companies (Regulation) Act, 2005, a non-banking financial company as defined under clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 has also been included as "credit institution". Further, the Credit Information Companies (Regulation) Act provides that every credit institution in existence shall become a member of at least one credit information company. Thus all NBFCs being credit institutions are required to become a member of at least one credit information company as per the statute.

In this regard, in terms of sub-sections (1) and (2) of Section 17 of the Credit Information Companies (Regulation) Act, 2005, a credit information company may require its members to furnish credit information as it may deem necessary in accordance with the provisions of the Act and every such credit institution has to provide the required information to that credit information company. Further, in terms of Regulation 10(a)(ii) of the Credit Information Companies Regulations, 2006, every credit institution shall:

(a) keep the credit information maintained by it, updated regularly on a monthly basis or at such shorter intervals as may be mutually agreed upon between the credit institution and the credit information company; and

(b)    take all such steps which may be necessary to ensure that the credit information furnished by it, is update, accurate and complete.

It was therefore, advised that NBFCs which had become member / members of any new credit information company / companies may provide them the current data in the existing format. Such NBFCs were also advised to provide historical data in order to enable the new credit information companies to validate their software and develop a robust database. 21 However, NBFCs which are registered with the Bank as Core Investment Companies, Primary Dealers and those purely into investment activities without any customer interface are exempt from the applicability of these instructions.

16.1 22 Data Format for Furnishing of Credit Information to Credit Information Companies (CICs) and other Regulatory Measures

A committee to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies (Chairman: Shri AdityaPuri) was constituted by the Reserve Bank of India (RBI). The Report of the Committee was placed on RBI’s website on March 22, 2014 inviting comments on the recommendations of the Committee. Subsequently, the Bank issued the Circular DBOD.No.CID.BC.127/20.16.056/2013-14 dated June 27, 2014 laying down instructions regarding the following:

i) Creating Awareness about Credit Information Report (CIR); ii) Usage of CIR in all Lending Decisions and Account Opening; iii) Populating Commercial Data Records in Databases of all CICs; iv) Standardisation of Data Format; v) Constitution of a Technical Working Group; vi) Process of Rectification of Rejected Data; vii) Determining Data Quality Index, viii) Calibration of Credit Score and Standardising Format of CIR. ix) Best practices for Banks/FIs.

16.2 Membership of Credit Information Companies (CICs)

23 Presently, four CICs, viz. Credit Information Bureau (India) Limited, Equifax Credit Information Services Private Limited, Experian Credit Information Company of India Private Limited and CRIF High Mark Credit Information Services Private Limited have been granted Certificate of Registration by RBI. In terms of Section 15 of the Credit Information Companies (Regulation) Act, 2005 (CICRA), every Credit Institution shall become member of at least one CIC. Further, Section 17 of CICRA stipulates that a CIC may seek and obtain credit information from its members (Credit Institution / CIC) only. As a result, when a Specified User, as defined in CICRA and Credit Information Companies Regulations, 2006, obtains credit information on a particular borrower/client from a CIC, it gets only such information that has been provided to the CIC by its members. This does not include credit history related to those non-member Credit Institutions with which the borrower/client has/had a current or a past exposure. To overcome this problem of incomplete/inaccurate credit information, pros and cons of certain possible alternatives have been discussed in the Report of the Committee to Recommend Data Format for Furnishing of Credit information to Credit Information Companies (Chairman: Shri Aditya Puri) constituted by the Reserve Bank of India (RBI). The report of the committee can be accessed on the following URL: http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=763 .

These alternatives along with suggestions/comments obtained from IBA and the CICs have been examined by RBI. It has been decided that the best option would be to mandate all Credit Institutions to become members of all CICs and moderate the membership and annual fees suitably. These instructions would be reviewed in due course.

17. 24 Implementation of Green Initiative of the Government

As part of the ‘Green Initiative’ of the Government, the Government of India had suggested that steps be taken by entities in financial sector, including NBFCs to help better utilisation of their resources and also better delivery of services. NBFCs were  therefore, requested to take proactive steps in this regard by increasing the use of electronic payment systems, elimination of post-dated cheques and gradual phase-out of cheques in their day to day business transactions which would result in more cost-effective transactions and faster and accurate settlements.

18. 25 Attempt to defraud using fake bank guarantee-modus operandi

In view of reports of instances of frauds involving fake Bank Guarantee with forged signature etc in certain bank branches, NBFCs were  advised to take notice of the  names of the beneficiaries /representative of beneficiaries and applicants of  BGs in order to exercise due caution while handling cases involving the firms/individuals cited in the circular.

19. 26 Credit Default Swaps – NBFCs as Users

NBFCs shall only participate in CDS market as users. As users, they would be permitted to buy credit protection only to hedge their credit risk on corporate bonds they hold. They are not permitted to sell protection and hence not permitted to enter into short positions in the CDS contracts. However, they are permitted to exit their bought CDS positions by unwinding them with the original counterparty or by assigning them in favour of buyer of the underlying bond.

Apart from complying with all the provisions above, NBFCs were advised that, as users, they shall also be required to ensure that the guidelines enclosed including operational requirements for CDS are fulfilled by them.

20. 27 Revisions to the Guidelines on Securitisation Transactions

I. Detailed Guidelines on Securitisation of Standard Assets were issued to NBFCs vide Circular DBOD.NO.BP.BC.60/21.04.048/2005-06 dated February 01, 2006 .

In order to prevent unhealthy practices surrounding securitization viz. origination of loans for the sole purpose of securitization and in order to align the interest of the originator with that of the investors and with a view to redistribute credit risk to a wide spectrum of investors, it was felt necessary that originators should retain a portion of each securitization originated and ensure more effective screening of loans. In addition, a minimum period of retention of loans prior to securitization was also considered desirable, to give comfort to the investors regarding the due diligence exercised by the originator. Keeping in view the above objectives, revised guidelines were issued in this regard to banks and NBFCs also ( Annex-1 ). The guidelines also include, inter alia, bilateral sale of assets, accounting of profits and disclosures.

II. 28 Reset of Credit Enhancement

a) Detailed Guidelines on reset of credit enhancement were issued to banks vide circular DBOD.No.BP.BC-25/21.04.177/2013-14, dated July 1, 2013 . The guidelines cover in detail the manner in which such reset could be carried out subject to the conditions prescribed therein. The applicability of these instructions have been extended to securitization transactions undertaken by NBFCs as well.

b) In respect of the transactions already entered into in terms of circular dated DNBS.PD.No.301/3.10.01/2012-13, dated August 21, 2012 , reset can be carried out subject to the consent of all investors of outstanding securities. In respect of the transactions entered into prior to August 2012 guidelines, the stipulation pertaining to MRR will also have to be complied with in addition to other conditions for reset of CE mentioned in para a) above.

21. 29 Standardisation and Enhancement of Security Features in Cheque Forms - Migrating to CTS 2010 Standards

All NBFCs were advised about the  "CTS-2010 standard“ which is a set of benchmarks towards achieving standardisation of cheques issued by banks across the country and include provision of mandatory minimum security features on cheque forms like quality of paper, watermark, bank's logo in invisible ink, void pantograph, etc., and standardisation of field placements on cheques. NBFCs were  advised that   "CTS-2010 standard“ were to be implemented by December 31, 2012 and those  NBFCs who accept post –dated cheques from their customers for future EMI payments were required to ensure the replacement of Non–CTS-2010 standard compliant cheques with CTS-2010 standard compliant cheques before December 31, 2012. However, 30 taking into consideration the representations from NBFCs, it was decided to extend the time up to March 31, 2013 to ensure withdrawal of Non-CTS 2010 Standard compliant cheques and replace them with CTS-2010 Standard compliant cheques. However, NBFCs were advised to note that the residual Non-CTS-2010 Standard compliant cheques that get presented in the clearing system beyond the extended period, will continue to be accepted for the clearing but will be cleared at less frequent intervals.

22. 31 Migration of Post-dated cheques (PDC)/Equated Monthly Installment (EMI) Cheques to Electronic Clearing Service (Debit)

Reference is invited to circular issued by our Department of Payment and Settlement System ( DPSS.CO.CHD.No.133/04.07.05/2013-14 dated July 16, 2013 ) wherein it has been indicated that cheques not complying with CTS-2010 Standard will be cleared at less frequent intervals with effect from January 1, 2014 (thrice a week up to April 30, 2014, twice a week up to October 31, 2014 and weekly once from November 1, 2014 onwards).

To avoid delays in realization of non-CTS-2010 cheques, all NBFCs were advised

a) to migrate towards accepting only CTS-2010 standard cheques

b) Not to accept fresh / additional Post Dated Cheques (PDC) / Equated Monthly Installment (EMI) cheques (either in old format or new CTS-2010 format) in locations where the facility of ECS / RECS (Debit) is available. The existing PDCs / EMI cheques in such locations may be converted into ECS / RECS (Debit) by obtaining fresh ECS (Debit) mandates. This exercise were to be completed by December 31, 2013.

Considering the protection available under Section 25 of the Payment and Settlement Systems Act, 2007 which accords the same rights and remedies to the payee (beneficiary) against dishonor of electronic funds transfer instructions under insufficiency of funds as are available under Section 138 of the Negotiable Instruments Act, 1881, it was advised that there is no need for NBFCs to take additional cheques, if any, from customers in addition to ECS (Debit) mandates. Cheques complying with CTS-2010 standard formats shall alone be obtained in locations, where the facility of ECS/RECS is not available.

23. 32 Readiness of major service providers to migrate from IPv4 to IPv6

Government of India had envisaged providing “Broadband on Demand” by 2015 in the recently unveiled National Telecom Policy (NTP) – 2012 emphasizing the role of Internet as catalyst for socio-economic development of a country which serves as an effective medium of various citizen centric services in today’s information economy.

Department of Telecommunication under the Ministry of Communication and Information Technology, Government of India has undertaken the initiative of migration from IPv4 to IPv6. Since migration to IPv6 is an eventuality that has to be accepted and manage proactively, NBFCs/RNBCs were advised to initiate necessary action by constituting a special team to complete the migration by December 2012.

24. 33 Checklist for NBFCs, Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs), Non Banking Financial Company-Factoring Institutions (NBFC-Factors) and Core Investment Companies (CICs)

Five checklists with respect to Application for seeking Certificate of Registration from the Reserve Bank have been uploaded in the RBI website, a) documents required for registration as NBFCs b) documents required for registration of NBFC-MFI – New Companies and c) documents required for registration of NBFC-MFI (Existing NBFCs) d) documents required for registration of NBFC – Factors and e) documents required for registration as CIC-ND-SI. ( Annex 2 )

Checklists mentioned are indicative and not exhaustive. Bank can, if necessary, call for any further documents to satisfy themselves on the eligibility for obtaining registration as NBFC. In the event of the Bank calling for further documents in addition to those mentioned in the checklist, the applicant company must respond within a stipulated time of one month failing which the application/request for conversion along with all the documents will be returned to the company for submission afresh with the required information/documents.

25. 34 Raising Money through Private Placement by NBFCs-Debentures etc.

NBFCs raise money by issuing capital/debt securities including debentures by way of public issue or private placement. In the case of public issue of such securities, institutions and retail investors can participate. Private placement, on the other hand, may involve institutional investors. It has however been observed that NBFCs have lately been raising resources from the retail public on a large scale, through private placement, especially by issue of debentures.

As certain adverse features have come to the notice of the Reserve Bank in private placements by certain NBFCs, it has been decided to put in place a minimum set of guidelines (given in Annex-3 ) for compliance by all NBFCs 35 except Primary Dealers. The Guidelines require NBFCs to space out such issuances and also aim to bring NBFCs at par with other financial entities as far as private placement is concerned by restricting the maximum number of subscribers to forty nine (currently the ceiling of investors stipulated by the Companies Act 1956 for private placement is not applicable for NBFCs). It may be noted that all other extant guidelines on private placement remain unchanged. The provisions of these guidelines would however override other instructions in this regard, wherever contradictory.

26. 36 Filing of records of mortgages with the Central Registry

All NBFCs were advised to file and register the records of equitable mortgages created in their favour on or after 31st March 2011 with the Central Registry and also register the records with the Central Registry as and when equitable mortgages are created in their favour. 37 In continuation of the above, NBFCs were further advised to register all types of mortgages with CERSAI.

27. 38 Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy

The RBI issued Framework for Revitalizing Distressed Assets in the Economy (Framework) on January 30, 2014. The framework covered in the guidelines, has outlined a corrective action plan that will incentivize early identification of problem account, timely restructuring of accounts which are considered to be viable, and taking prompt steps by lenders for recovery or sale of unviable accounts. In the background of the above, to the extent it is applicable to NBFCs; guidelines will be effective from April 1, 2014; as given in Annex-4 .

28 39 Rounding off transactions to the Nearest Rupee by NBFCs

NBFCs were advised that all transactions, including payment of interest on deposits/ charging of interest on advances, should be rounded off to the nearest rupee, i.e. fractions of 50 paise and above shall be rounded off to the next higher rupee and fractions of less than 50 paise should be ignored. Further, NBFCs were also advised to ensure that cheques/ drafts issued by clients containing fractions of a rupee should not be rejected by them.

Revisions to the Guidelines on Securitisation Transactions

Guidelines on Securitisation of Standard Assets

1 Requirements to be met by the orginating NBFCs

1.1 Assets Eligible for Securitisation

In a single securitisation transaction, the underlying assets should represent the debt obligations of a homogeneous pool of obligors 1 . Subject to this condition, all on-balance sheet standard assets 2 except the following, will be eligible for securitisation by the originators :

i) Revolving credit facilities (e.g., Credit Card receivables)

ii) Assets purchased from other entities

iii) Securitisation exposures (e.g. Mortgage-backed / asset-backed securities)

iv) Loans with bullet repayment of both principal and interest 3 .

1.2 Minimum Holding Period (MHP)

1.2.1 Originating NBFCs can securitise loans only after these have been held by them for a minimum period in their books. The criteria governing determination of MHP for assets listed below reflect the need to ensure that :

* the project implementation risk is not passed on to the investors, and

* a minimum recovery performance is demonstrated prior to securitisation to ensure better underwriting standards

1.2.2 NBFCs can securitise loans only after a MHP counted from the date of full disbursement of loans for an activity / purpose; acquisition of asset (i.e., car, residential house etc.) by the borrower or the date of completion of a project, as the case may be. MHP would be defined with reference to the number of instalments to be paid prior to securitisation. MHP applicable to various loans depending upon the tenor and repayment frequency is given in the following table 4 .

1.2.3 The MHP will be applicable to individual loans in the pool of securitised loans. MHP will not be applicable to loans referred to in foot note 3 of para 1.1.

1.3 Minimum Retention Requirement (MRR)

The originating NBFCs should adhere to the MRR detailed in the Table below while securitising loans :

1.3.2 MRR will have to be maintained by the entity which securitises the loans. In other words, it cannot be maintained by other entities which are treated as 'originator' in terms of para 5(vi) of the circular dated February 1, 2006 containing Guidelines on Securitisation of Standard Assets.

1.3.3 The MRR should represent the principal cash flows. Therefore, NBFCs' investment in the Interest Only Strip representing the Excess Interest Spread / Future Margin Income, whether or not subordinated, will not be counted towards the MRR.

1.3.4 The level of or selling the retained interest commitment by originators i.e., MRR should not be reduced either through hedging of credit risk. The MRR as a percentage of unamortised principal should be maintained on an ongoing basis except for reduction of retained exposure due to proportionate repayment or through the absorption of losses. The form of MRR should not change during the life of securitisation.

1.3.5 For complying with the MRR under these guidelines NBFCs should ensure that proper documentation in accordance with law is made.

1.4 Limit on Total Retained Exposures

1.4.1 At present, total investment by the originator in the securities issued by the SPV through underwriting or otherwise is limited to 20% of the total securitised instruments issued. It has been decided that the total exposure of NBFCs to the loans securitised in the following forms should not exceed 20% of the total securitised instruments issued :

- Investments in equity / subordinate / senior tranches of securities issued by the SPV including through underwriting commitments

- Credit enhancements including cash and other forms of collaterals including overcollateralisation, but excluding the credit enhancing interest only strip

- Liquidity support.

1.4.2 If an NBFC exceeds the above limit, the excess amount would be risk weighted at 667% 5 .

1.4.3 The 20% limit on exposures will not be deemed to have been breached if it is exceeded due to amortisation of securitisation instruments issued.

1.5 Booking of Profit Upfront

1.5.1 In terms of para 20.1 of circular DBOD.No.BP.BC.60/21.04.048/2005-06 dated February 1, 2006 , any profit / premium arising on account of securitisation of loans should be amortised over the life of the securities issued or to be issued by the SPV. These instructions were inter alia intended to discourage 'originate-to-distribute' model. Now that these concerns are sought to be addressed to some extent by MRR, MHP and other measures being proposed in these guidelines, it has been decided to allow higher recognition of cash profits during a year based on amortisation of principal and losses incurred as well as specific provision requirements on the securitisation exposures as explained below :

The amount of profit received in cash may be held under an accounting head styled as "Cash Profit on Loan Transfer Transactions Pending Recognition" maintained on individual transaction basis. The amortisation of cash profit arising out of securitisation transaction will be done at the end of every financial year and calculated as under :

Profit to be amortised = Max{L, [(X*(Y/Z))], [(X/n)]}

X = amount of unamortised cash profit lying in the account 'Cash Profit on Loan Transfer Transactions Pending Recognition' at the beginning of the year

Y = amount of principal amortised during the year

Z = amount of unamortised principal at the beginning of the year

L = Loss 6 (marked to market losses incurred on the portfolio + specific provisions, if any, made against the exposures to the particular securitisation transaction + direct write-off) excluding loss incurred on credit enhancing interest only strip 7

n = residual maturity of the securitisation transaction

1.5.2 The above method of amortisation of profit can be applied to outstanding securitisation transactions as well. However, the method can be applied only with respect to the outstanding amortisable profit and un-amortised principal outstanding as on the date of issuance of this circular.

1.5.3 At times, the originating NBFCs retain contractual right to receive some of the interest amount due on the transferred assets. This interest receivable by the originating NBFC represents a liability of the SPV and its present value is capitalised by the originating NBFC as an Interest Only Strip (I / O Strip), which is an on-balance sheet asset. Normally, a NBFC would recognise an unrealised gain in its Profit and Loss account on capitalisation of future interest receivable by way of I / O Strip. However, consistent with the instructions contained in circular dated February 1, 2006 referred to above, NBFCs should not recognise the unrealised gains in Profit and Loss account; instead they should hold the unrealised profit under an accounting head styled as "Unrealised Gain on Loan Transfer Transactions". The balance in this account may be treated as a provision against potential losses incurred on the I / O Strip due to its serving as credit enhancement for the securitisation transaction 8 . The profit may be recognised in Profit and Loss Account only when Interest Only Strip is redeemed in cash. As NBFCs would not be booking gain on sale represented by I / O Strip upfront, it need not be deducted from Tier I capital. This method of accounting of Interest Only Strip can be applied to outstanding securitisation transactions as well.

1.6 Disclosures by the Originating NBFCs

1.6.1 Disclosures to be made in Servicer / Investor / Trustee Report

The above periodical disclosures should be made separately for each securitisation transaction, throughout its life, in the servicer report, investor report, trustee report, or any similar document published. The aforesaid disclosures can be made in the format given in Appendix 1 .

1.6.2 Disclosures to be made by the Originator in Notes to Annual Accounts

The Notes to Annual Accounts of the originating NBFCs should indicate the outstanding amount of securitised assets as per books of the SPVs sponsored by the NBFC and total amount of exposures retained by the NBFC as on the date of balance sheet to comply with the MRR. These figures should be based on the information duly certified by the SPV's auditors obtained by the originating NBFC from the SPV. These disclosures should be made in the format given in Appendix 2 .

1.7 Loan Origination Standards

The originating NBFCs should apply the same sound and well-defined criteria for credit underwriting to exposures to be securitised as they apply to exposures to be held on their book. To this end, the same processes for approving and, where relevant, amending, renewing and monitoring of credits should be applied by the originators.

1.8 Treatment of Securitised Assets not Meeting the Requirements Stipulated above

All instructions contained in this paragraph will be applicable only to the new transactions unless explicitly stated otherwise. If an originating NBFC fails to meet the requirement laid down in the paragraphs 1.1 to 1.7 above, it will have to maintain capital for the securitised assets as if these were not securitised. This capital would be in addition to the capital which the NBFC is required to maintain on its other existing exposures to the securitisation transaction.

2. Requirements to be met by NBFCs other than originators having Securitisation exposure

2.1 Standards for Due Diligence

2.1.1 NBFCs can invest in or assume exposure to a securitisation position only if the originator (other NBFCs / FIs / banks) has explicitly disclosed to the credit institution that it has adhered to MHP and MRR stipulated in these guidelines and will adhere to MRR guidelines on an ongoing basis.

2.1.2 Before investing, and as appropriate thereafter, NBFCs should be able to demonstrate for each of their individual securitisation positions, that they have a comprehensive and thorough understanding of risk profile of their proposed / existing investments in securitised positions. NBFCs will also have to demonstrate that for making such an assessment they have implemented formal policies and procedures appropriate for analysing and recording the following :

information disclosed by the originators regarding the MRR in the securitisation, on at least half yearly basis;

the risk characteristics of the individual securitisation position including all the structural features of the securitisation that can materially impact the performance of the investing NBFC's securitisation position (i.e., the seniority of the tranche, thickness of the subordinate tranches, its sensitivity to prepayment risk and credit enhancement resets, structure of repayment waterfalls, waterfall related triggers, the position of the tranche in sequential repayment of tranches (time-tranching), liquidity enhancements, availability of credit enhancements in the case of liquidity facilities, deal-specific definition of default, etc.);

the risk characteristics of the exposures underlying the securitization position (i.e., the credit quality, extent of diversification and homogeneity of the pool of loans, sensitivity of the repayment behavior of individual borrowers to factors other than their sources of income, volatility of the market values of the collaterals supporting the loans, cyclicality of the economic activities in which the underlying borrowers are engaged, etc.);

the reputation of the originators in terms of observance of credit appraisal and credit monitoring standards, adherence to MRR and MHP standards in earlier securitisations, and fairness in selecting exposures for securitisation;

loss experience in earlier securitisations of the originators in the relevant exposure classes underlying the securitisation position, incidence of any frauds committed by the underlying borrowers, truthfulness of the representations and warranties made by the originator;

the statements and disclosures made by the originators, or their agents or advisors, about their due diligence on the securitized exposures and, where applicable, on the quality of the collateral supporting the securitised exposures; and

where applicable, the methodologies and concepts on which the valuation of collateral supporting the securitised exposures is based and the policies adopted by the originator to ensure the independence of the valuer.

2.1.3 When the securitised instruments are subsequently purchased in the secondary market by an NBFC, it should, at that point in time, ensure that the originator has explicitly disclosed that it will retain a position that meets the MRR.

2.2 Stress Testing

2.3 Credit Monitoring

NBFCs need to monitor on an ongoing basis and in a timely manner, performance information on the exposures underlying their securitization positions and take appropriate action, if any, required. Action may include modification to exposure ceilings to certain type of asset class underlying securitisation transaction, modification to ceilings applicable to originators etc. For this purpose, NBFCs should establish formal procedures commensurate with the risk profile of their exposures in securitised positions as stipulated in para 2.1.2. Where relevant, this shall include the exposure type, the percentage of loans more than 30, 60, 90, 120 and 180 days past due, default rates, prepayment rates, loans in foreclosure, collateral type and occupancy and frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan to value ratios with bandwidths that facilitate adequate sensitivity analysis. NBFCs may inter alia make use of the disclosures made by the originators in the form given in Appendix 1 to monitor the securitisation exposures.

2.4 Treatment of Exposures not Meeting the Requirements Stipulated above

The investing NBFCs will assign a risk weight of 667% to the securitisation exposures where the requirements in the paragraphs 2.1 to 2.3 above are not met. While NBFCs should make serious efforts to comply with the guidelines contained in paragraphs 2.1 to 2.3, the higher risk weight of 667% will be applicable with effect from October 01, 2012. NBFCs should put in place necessary systems and procedures to implement the requirements in paragraphs 2.1 to 2.3 before October 31, 2012.

Guidelines on Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities

1. Requirements to be met by the Originating NBFCs

1.1 Assets Eligible for Transfer 9

1.1.1 Under these guidelines, NBFCs can transfer a single standard asset or a part of such asset or a portfolio of such assets to financial entities through an assignment deed with the exception of the following :

Revolving credit facilities (e.g., Credit Card receivables)

Assets purchased from other entities

Assets with bullet repayment of both principal and interest 10

1.1.2 However, these guidelines do not apply to :

Transfer of loan accounts of borrowers by an NBFC to other NBFCs / FIs / banks and vice versa, at the request / instance of borrower;

Trading in bonds;

Sale of entire portfolio of assets consequent upon a decision to exit the line of business completely. Such a decision should have the approval of Board of Directors of the NBFC;

Consortium and syndication arrangements.

Any other arrangement / transactions, specifically exempted by the Reserve Bank of India.

1.3.1 The originating NBFCs should adhere to the MRR detailed in the Table below while transferring assets to other financial entities :

1.3.2 In the case of partial sale of assets, if the portion retained by the seller is more than the MRR required as per para 1.3.1 above, then out of the portion retained by the seller, the portion equivalent to 5% of the portion sold or 10% of the portion sold, as the case may be, would be treated as MRR. However, all exposures retained by the selling NBFC including MRR should rank pari-passu with the sold portion of the asset.

1.3.3 NBFCs should not offer credit enhancements in any form and liquidity facilities in the case of loan transfers through direct assignment of cash flows, as the investors in such cases are generally the institutional investors who should have the necessary expertise to appraise and assume the exposure after carrying out the required due diligence. NBFCs should also not retain any exposures through investment in the Interest Only Strip representing the Excess Interest Spread / Future Margin Income from the loans transferred. However, the originating NBFCs will have to satisfy the MRR requirements stipulated in para 1.3.1 above. NBFCs' retention of partial interest in the loans transferred to comply with the MRR indicated in para 1.3.1 should be supported by a legally valid documentation. At a minimum, a legal opinion regarding the following should also be kept on record by the originator :

legal validity of amount of interest retained by the originator;

such arrangement not interfering with assignee's rights and rewards associated with the loans to the extent transferred to it; and

the originator not retaining any risk and rewards associated with the loans to the extent transferred to the assignee.

1.3.4 MRR will have to be maintained by the entity which sells the loans. In other words, it cannot be maintained by other entities which are treated as 'originator' in terms of para 5(vi) of the circular dated February 1, 2006 containing guidelines on securitisation of standard assets.

1.3.5 The level of commitment by originators i.e., MRR should not be reduced either through hedging of credit risk or selling the retained interest. The MRR as a percentage of unamortised principal should be maintained on an ongoing basis except for reduction of retained exposure due to proportionate repayment or through the absorption of losses. The form of MRR should not change during the life of transaction.

1.3.6 For complying with the MRR under these guidelines, NBFCs should ensure that proper documentation in accordance with law is made.

1.4 Booking of Profit Upfront

1.4.1 The amount of profit in cash on direct sale of loans may be held under an accounting head styled as "Cash Profit on Loan Transfer Transactions Pending Recognition" maintained on individual transaction basis and amortised over the life of the transaction. The amortisation of cash profit arising out of loan assignment transaction will be done at the end of every financial year and calculated as under :

Profit to be amortised = Max {L, [(X*(Y/Z)], [(X/n)]}

L = Loss (specific provisions to be made on retained exposures for credit losses plus direct write-off plus any other losses, if any) 11 incurred on the portfolio

1.4.2 Accounting, Asset Classification and provisioning norms for MRR

The asset classification and provisioning rules in respect of the exposure representing the MRR would be as under :

The originating NBFC may maintain a consolidated account of the amount representing MRR if the loans transferred are retail loans. In such a case, the consolidated amount receivable in amortisation of the MRR and its periodicity should be clearly established and the overdue status of the MRR should be determined with reference to repayment of such amount. Alternatively, the originating NBFC may continue to maintain borrower-wise accounts for the proportionate amounts retained in respect of those accounts. In such a case, the overdue status of the individual loan accounts should be determined with reference to repayment received in each account.

In the case of transfer of a pool of loans other than retail loans, the originator should maintain borrower-wise accounts for the proportionate amounts retained in respect of each loan. In such a case, the overdue status of the individual loan accounts should be determined with reference to repayment received in each account.

If the originating NBFC acts as a servicing agent of the assignee bank / NBFC for the loans transferred, it would know the overdue status of loans transferred which should form the basis of classification of the entire MRR / individual loans representing MRR as NPA in the books of the originating NBFC, depending upon the method of accounting followed as explained in para (a) and (b) above.

1.5 Disclosures by the Originating NBFCs

Same as in para 1.6 of Section A.

1.6 Loan Origination Standards

Same as in para 1.7 of Section A.

1.7 Treatment of Assets sold not Meeting the Requirements stipulated above

All instructions contained in this paragraph except in para 1.4.2 will be applicable only to the new transactions undertaken on or after the date of this circular. Instructions in para 1.4.2 will be applicable to both existing and new transactions 12 . If an originating NBFC fails to meet the requirement laid down in paragraphs 1.1 to 1.6 above, it will have to maintain capital for the assets sold as if these were still on the books of the NBFC (originating NBFC).

2. Requirements to be met by the Purchasing NBFCs

2.1 Restrictions on Purchase of loans

NBFCs can purchase loans from other NBFCs / FIs / banks in India only if the seller has explicitly disclosed to the purchasing NBFCs that it will adhere to the MRR indicated in para 1.3 on an ongoing basis. In addition, for domestic transactions, purchasing NBFCs should also ensure that the originating institution has strictly adhered to the MHP criteria prescribed in the guidelines in respect of loans purchased by them.

2.2 Standards for Due Diligence

2.2.1 NBFCs should have the necessary expertise and resources in terms of skilled manpower and systems to carry out the due diligence of the loans / portfolios of loans before purchasing them. In this regard the purchasing NBFCs should adhere to the following guidelines :

NBFCs with the approval of their Board of Directors, should formulate policies regarding the process of due diligence which needs to be exercised by the NBFCs' own officers to satisfy about the Know Your Customer requirements and credit quality of the underlying assets. Such policies should inter alia lay down the methodology to evaluate credit quality of underlying loans, the information requirements etc.

The due diligence of the purchased loans cannot be outsourced by the NBFC and should be carried out by its own officers with the same rigour as would have been applied while sanctioning new loans by the NBFC.

If an NBFC wishes to outsource certain activities like collection of information and documents etc., then NBFCs would continue to retain full responsibility in regard to selection of loans for purchase and compliance with Know Your Customer requirements.

2.2.2 Before purchasing individual loans or portfolio of loans, and as appropriate thereafter, NBFCs should be able to demonstrate that they have a comprehensive and thorough understanding of and have implemented formal policies and procedures commensurate with the risk profile of the loans purchased analysing and recording :

information disclosed by the originators regarding the MRR, on an ongoing basis;

the risk characteristics of the exposures constituting the portfolio purchased (i.e., the credit quality, extent of diversification and homogeneity of the pool of loans, sensitivity of the repayment behavior of individual borrowers to factors other than their sources of income, volatility of the market values of the collaterals supporting the loans, cyclicality of the economic activities in which the underlying borrowers are engaged, etc.);

the reputation of the originators in terms of observance of credit appraisal and credit monitoring standards, adherence to MRR and MHP standards in earlier transfer of portfolios and fairness in selecting exposures for transfer;

loss experience in earlier transfer of loans / portfolios by the originators in the relevant exposure classes underlying and incidence of any frauds committed by the underlying borrowers, truthfulness of the representations and warranties made by the originator;

the statements and disclosures made by the originators, or their agents or advisors, about their due diligence on the assigned exposures and, where applicable, on the quality of the collateral supporting the loans transferred; and

where applicable, the methodologies and concepts on which the valuation of loans transferred is based and the policies adopted by the originator to ensure the independence of the valuer.

2.3 Stress Testing

NBFCs should regularly perform their own stress tests appropriate to the portfolios of loans purchased by them. For this purpose, various factors which may be considered include, but are not limited to, rise in default rates in the underlying portfolios in a situation of economic downturn and rise in pre-payment rates due to fall in rate of interest or rise in income levels of the borrowers leading to early redemption of exposures.

2.4 Credit monitoring

2.4.1 The purchasing NBFCs need to monitor on an ongoing basis and in timely manner performance information on the loans purchased and take appropriate action required, if any. Action may include modification to exposure ceilings to certain type of asset classes, modification to ceilings applicable to originators etc. For this purpose, NBFCs should establish formal procedures appropriate and commensurate with the risk profile of the purchased loans. Such procedures should be as rigorous as that followed by the NBFC for portfolios of similar loans directly originated by it. In particular, such procedures must facilitate timely detection of signs of weaknesses in individual accounts and identification of non-performing borrowers as per RBI guidelines as soon as loans are 180 days past due. The information collected should include the exposure type, the percentage of loans more than 30, 60, 90, 120 and 180 days past due, default rates, prepayment rates, loans in foreclosure, collateral type and occupancy, and frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan to value ratios with band widths that facilitate adequate sensitivity analysis. Such information, if not collected directly by the NBFC and obtained from the servicing agent, should be certified by the authorized officials of the servicing agent. NBFCs may inter alia make use of the disclosures made by the originators in the form given in Appendix 1 to monitor the exposures.

2.4.2 Depending upon the size of the portfolio, credit monitoring procedures may include verification of the information submitted by the bank / NBFC's concurrent and internal auditors. The servicing agreement should provide for such verifications by the auditors of the purchasing NBFC. All relevant information and audit reports should be available for verification by the Inspecting Officials of RBI during the Annual Financial Inspections of the purchasing NBFCs.

2.5 True Sale Criteria 13

2.5.1 The 'sale' (this term would hereinafter include direct sale, assignment and any other form of transfer of asset, but does not include bills rediscounted, outright transfer of loan accounts to other financial entities at the instance of the borrower and sale of bonds other than those in the nature of advance) should result in immediate legal separation of the 'selling NBFC' 14 (this term hereinafter would include direct selling NBFC, assigning NBFC and the NBFC transferring assets through any other mode), from the assets 15 which are sold. The assets should stand completely isolated from the selling NBFC, after its transfer to the buyer, i.e., put beyond the selling NBFC's as well as its creditors' reach, even in the event of bankruptcy of the selling / assigning / transferring NBFC.

2.5.2 The selling NBFC should effectively transfer all risks / rewards and rights / obligations pertaining to the asset and shall not hold any beneficial interest in the asset after its sale except those specifically permitted under these guidelines. The buyer should have the unfettered right to pledge, sell, transfer or exchange or otherwise dispose of the assets free of any restraining condition. The selling NBFC shall not have any economic interest in the assets after its sale and the buyer shall have no recourse to the selling NBFC for any expenses or losses except those specifically permitted under these guidelines.

2.5.3 There shall be no obligation on the selling NBFC to re-purchase or fund the repayment of the asset or any part of it or substitute assets held by the buyer or provide additional assets to the buyer at any time except those arising out of breach of warranties or representations made at the time of sale. The selling NBFC should be able to demonstrate that a notice to this effect has been given to the buyer and that the buyer has acknowledged the absence of such obligation.

2.5.4 The selling NBFC should be able to demonstrate that it has taken all reasonable precautions to ensure that it is not obliged, nor will feel impelled, to support any losses suffered by the buyer.

2.5.5 The sale shall be only on cash basis and the consideration shall be received not later than at the time of transfer of assets. The sale consideration should be market-based and arrived at in a transparent manner on an arm's length basis.

2.5.6 If the seller of loans acts as the servicing agent for the loans, it would not detract from the 'true sale' nature of the transaction, provided such service obligations do not entail any residual credit risk on the sold assets or any additional liability for them beyond the contractual performance obligations in respect of such services.

2.5.7 An opinion from the selling NBFC's Legal Counsel should be kept on record signifying that : (i) all rights, titles, interests and benefits in the assets have been transferred to the buyer; (ii) selling NBFC is not liable to the buyer in any way with regard to these assets other than the servicing obligations as indicated in para 2.5.6 above; and (iii) creditors of the selling NBFC do not have any right in any way with regard to these assets even in case of bankruptcy of the selling NBFC.

2.5.8 Any re-schedulement, restructuring or re-negotiation of the terms of the underlying agreement/s effected after the transfer of assets to the buyer, shall be binding on the buyer and not on the selling NBFC except to the extent of MRR.

2.5.9 The transfer of assets from selling NBFC must not contravene the terms and conditions of any underlying agreement governing the assets and all necessary consents from obligors (including from third parties, where necessary) should have been obtained.

2.5.10 In case the selling NBFC also provides servicing of assets after the sale under a separate servicing agreement for fee, and the payments / repayments from the borrowers are routed through it, it shall be under no obligation to remit funds to the buyer unless and until these are received from the borrowers.

2.6 Representations and Warranties

An originator that sells assets to other financial entities may make representations and warranties concerning those assets. Where the following conditions are met the seller will not be required to hold capital against such representations and warranties.

Any representation or warranty is provided only by way of a formal written agreement.

The seller undertakes appropriate due diligence before providing or accepting any representation or warranty.

The representation or warranty refers to an existing state of facts that is capable of being verified by the seller at the time the assets are sold.

The representation or warranty is not open-ended and, in particular, does not relate to the future creditworthiness of the loans / underlying borrowers.

The exercise of a representation or warranty, requiring an originator to replace asset (or any parts of them) sold, on grounds covered in the representation or warranty, must be : * undertaken within 120 days of the transfer of assets; and * conducted on the same terms and conditions as the original sale.

A seller 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 : * the onus of proof for breach of representation or warranty remains at all times with the party so alleging; * the party alleging the breach serves a written Notice of Claim on the seller, specifying the basis for the claim; and * damages are limited to losses directly incurred as a result of the breach

A seller should notify RBI (Department of Non-Banking Supervision) of all instance where it has agreed to replace assets sold to another financial entity or pay damages arising out of any representation or warranty.

2.7 Re-purchase of Assets

In order to limit the extent of effective control of transferred assets by the seller in the case of direct assignment transactions, NBFCs should not have any re-purchase agreement including through "clean-up calls" on the transferred assets.

2.8 Applicability of Capital Adequacy and other Prudential Norms

2.8.1 The capital adequacy treatment for direct purchase of loans will be as per the rules applicable to loans directly originated by the NBFCs. Investment in tranches of securitized loans will attract capital adequacy and other prudential norms as applicable to securitization transactions. NBFCs may, if they so desire, have the pools of loans rated before purchasing so as to have a third party view of the credit quality of the pool in addition to their own due diligence. However, such rating cannot substitute for the due diligence that the purchasing NBFC is required to perform in terms of para 2.2 of this Section.

2.8.2 In purchase of pools of both retail and non-retail loans, income recognition, asset classification, provisioning and exposure norms for the purchasing NBFC will be applicable based on individual obligors and not based on portfolio. NBFCs should not apply the asset classification, income recognition and provisioning norms at portfolio level, as such treatment is likely to weaken the credit supervision due to its inability to detect and address weaknesses in individual accounts in a timely manner. If the purchasing NBFC is not maintaining the individual obligor-wise accounts for the portfolio of loans purchased, it should have an alternative mechanism to ensure application of prudential norms on individual obligor basis, especially the classification of the amounts corresponding to the obligors which need to be treated as NPAs as per existing prudential norms. One such mechanism could be to seek monthly statements containing account-wise details from the servicing agent to facilitate classification of the portfolio into different asset classification categories. Such details should be certified by the authorized officials of the servicing agent. NBFC's concurrent auditors, internal auditors and statutory auditors should also conduct checks of these portfolios with reference to the basic records maintained by the servicing agent. The servicing agreement should provide for such verifications by the auditors of the purchasing NBFC. All relevant information and audit reports should be available for verification by the Inspecting Officials of RBI during the Annual Financial Inspections of the purchasing NBFCs.

2.8.3 The purchased loans will be carried at acquisition cost unless it is more than the face value, 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 NBFCs. The outstanding / unamortised premium need not be deducted from capital. The discount / premium on the purchased loans can be accounted for on portfolio basis or allocated to individual exposures proportionately.

2.9 Treatment of Exposures not Meeting the Requirements Stipulated Above

The investing NBFCs will assign a risk weight of 667% to the assignment exposures where the requirements in paragraphs 2.1 to 2.8 above are not met. While NBFCs should make serious efforts to comply with the guidelines contained in paragraphs 2.1 to 2.4, the higher risk weight of 667% for non-compliance of these paragraphs will be applicable with effect from October 01, 2012. NBFCs should put in place necessary systems and procedures to implement the requirements in paragraphs 2.1 to 2.4 before October 31, 2012.

Securitisation Activities / Exposures not permitted

1. At present, NBFCs in India are not permitted to undertake the securitisation activities or assume securitisation exposures as mentioned below.

1.1 Re-securitisation of Assets

A re-securitisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure. In addition, an exposure to one or more resecuritisation exposures is a re-securitisation exposure. This definition of resecuritised exposure will capture collateralised debt obligations (CDOs) of asset backed securities, including, for example, a CDO backed by residential mortgage backed securities (RMBS).

1.2 Synthetic Securitisations

A synthetic securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool.

1.3 Securitisation with Revolving Structures (with or without early amortisation features)

These involve exposures where the borrower is permitted to vary the drawn amount and repayments within an agreed limit under a line of credit (e.g. credit card receivables and cash credit facilities).Typically, revolving structures will have nonamortising assets such as credit card receivables, trade receivables, dealer floorplan loans and some leases that would support non-amortising structures, unless these are designed to include early amortisation features. Early amortisation means repayment of securities before their normal contractual maturity. At the time of early amortisation there are three potential amortisationmechanics : (i) Controlled amortisation; (ii) Rapid or non-controlled amortisation; and (iii) Controlled followed by a subsequent (after the completion of the controlled period) non-controlled amortisation phase.

2. The appropriateness and suitability of transactions prohibited in the above guidelines would be revisited in due course.

Appendix - 1

Format for Disclosure Requirements in offer documents, servicer report, investor report, etc. 16

Name / Identification No. of securitisation transaction 17

Disclosures to be made in Notes to Accounts by NBFCs

1 The single asset securitisations do not involve any credit tranching and redistribution of risk, and therefore, are not consistent with the economic objectives of securitisation.

2 In these guidelines the term loans / assets have been used to refer to loans, advances and bonds which are in the nature of advances

3 Trade receivables with tenor up to 12 months discounted / purchased by NBFCs from their borrowers will be eligible for securitisation. However, only those loans / receivables will be eligible for securitisation where a drawee of the bill has fully repaid the entire amount of last two loans / receivables within 180 days of the due date.

4 Where the repayment is at more than quarterly intervals, loans can be securitised after repayment of at-least two instalments.

5 The minimum CRAR requirement for NBFCs is 15%. Hence risk weight has been capped at 667% so as to ensure that the capital charge does not exceed the exposure value.

6 The losses, including marked-to-market losses, incurred by NBFCs, specific provisions, if any, and direct write-offs to be made on the MRR and any other exposures to the securitisation transaction (other than credit enhancing interest only strip) should be charged to Profit and Loss account. However, the amortisation formula would ensure that these debits to Profit and Loss account are offset to the extent there is balance in "Cash Profit on Loan Transfer Transactions Pending Recognition Account". NBFCs should also hold capital against securitisation exposures in terms of extant guidelines of RBI without taking into account balance in "Cash Profit on Loan Transfer Transactions Pending Recognition Account".

7 For accounting of losses in respect of credit enhancing interest only strip, please see para 1.5.3.

8 The I / O Strips may be amortising or non-amortising. In the case of amortising I / O strips, an NBFC would periodically receive in cash, only the amount which is left after absorbing losses, if any, supported by the I / O strip. On receipt, this amount may be credited to Profit and Loss account and the amount equivalent to the amortisation due may be written-off against the "Unrealised Gain on Loan Transfer Transactions" A/c bringing down the book value of the I / O strip in the NBFC's books. In the case of a non-amortising I / O Strip, as and when the NBFC receives intimation of charging-off of losses by the SPV against the I / O strip, it may write-off equivalent amount against "Unrealised Gain on Loan Transfer Transactions" A/c and bring down the book value of the I / O strip in the NBFC's books. The amount received in final redemption value of the I / O Strip received in cash may be taken to Profit and Loss account.

9 In these guidelines, transfer would mean transfer of assets through direct sale, assignment and any other form of transfer of assets. The generic term used for transfers would be sale and purchase.

10 Trade receivables with tenor up to 12 months discounted / purchased by NBFCs from their borrowers will be eligible for direct transfer through assignment. However, only those loans / receivables will be eligible for such transfer where a drawee of the bill has fully repaid the entire amount of last two loans / receivables within 180 days of the due date.

11 The specific provisions to be made as well as direct write-offs and other losses, if any, on the retained exposures should be charged to Profit and Loss account. In addition NBFCs should hold capital against the exposure retained as part of MRR as required in terms of extant guidelines of RBI without taking into account balance in "Cash Profit on Loan Transfer Transactions Pending Recognition" account. NBFCs will also be required to separately maintain 'standard asset' provisions on MRR as per existing instructions which should not be charged to the "Cash Profit on Loan Transfer Transactions Pending Recognition" A/c.

12 For existing transactions para 1.4.2 would apply to credit enhancements or any other type of retained exposures.

13 For true sale criteria for securitisation transaction, please refer to Guidelines on Securitisation of Standard Assets DBOD.NO.BP.BC.60/21.04.048/2005-06 dated February 01, 2006 as amended from time to time.

14 In this para, the term 'selling NBFC' will include other financial entities selling loans to NBFCs

15 In case of sale of a part of an asset, true sale criteria will apply to the part of the asset sold

16 This appendix will also be applicable to direct transfer of loans. For that purpose the words 'securitised assets'/'asset securitised' may be interpreted to mean 'loans directly transferred / assigned'. NBFCs should disclose / report the information in respect of securitisation and direct transfers separately.

17 These disclosures should be made separately for each securitisation transaction throughout the life of the transaction

18 This item is not relevant for direct transfer of loans, as there will be no credit enhancement, liquidity support and tranching.

19 Only the SPVs relating to outstanding securitisation transactions may be reported here

A. Guidelines on Private Placement by NBFCs:

1. Definitions:

"Preferential Allotment" or "Private placement" means 40 non-public offering of NCDs by NBFCs to such number of select subscribers and such subscription amounts, as may be specified by the Reserve Bank from time to time.

"Public issue" means an invitation by an NBFC to public to subscribe to the securities offered through a prospectus.

A Non-Banking Financial Company (NBFC) means an NBFC as defined in Section 45 I (f) read with Section 45 I (c) of the RBI Act, 1934.

2. Regulations

i. The offer document for private placement should be issued within a maximum period of 6 months from the date of the Board Resolution authorizing the issue. The offer document should include the names and designations of the officials who are authorised to issue the offer document. The Board Resolution and the offer document must contain information on purpose for which the resources are being raised.

ii. The offer document may be printed or typed "For Private Circulation Only". General information including the address of the registered office of the NBFC, date of opening / closing of the issue etc. shall be clearly mentioned in the offer document.

iii. An NBFC shall only issue debentures for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities/ parent company / associates. 41 However this clause shall not be applicable to Core Investment Companies.

iv. Private placement by all NBFCs shall be restricted to not more than 49 investors, identified upfront by the NBFC.

v. The minimum subscription amount for a single investor shall be Rs. 25 lakh and in multiples of Rs.10 lakh thereafter.

vi. 42 NBFCs, were  advised to put in place before the close of business on September 30, 2013, a Board approved policy for resource planning which, inter-alia, should cover the planning horizon and the periodicity of private placement.

vii. An NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue).

viii. AII other extant instructions with regard to private placement remain unchanged.

ix. The provisions of the Guidelines shall override other instructions wherever contradictory.

B. Security cover for debentures (by private placement or public issue):

NBFCs shall ensure that at all points of time the debentures issued, including short term NCDs, are fully secured. Therefore in case, at the stage of issue, the security cover is insufficient /not created, the issue proceeds shall be placed under escrow until creation of security, which in any case should be within one month from the date of issue. 43 However this clause shall not be applicable to subordinated debt, as defined under paragraph 2(1)(xvii) of the Non-Banking Financial (Non-Deposit Accepting or Holding Companies Prudential Norms (Reserve Bank) Directions, 2007.

C. Amendment to Directions:

(i) Para 2(xii)(f) and (i) of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 has been amended to clarify that only those debentures that are either compulsorily convertible into equity or fully secured would be exempted from the definition of public deposits. Hybrid / subordinated debt with a maturity not less than sixty months would continue to be exempted from the definition of public deposits provided there is no option for recall by the issuer within the period.

44 Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders : Framework for Revitalising Distressed Assets in the Economy

Corrective Action Plan to arrest increasing NPAs

1.1 Early Recognition of Stress and Reporting to Central Repository of Information on Large Credits (CRILC)

2.1.1 Before a loan account turns into an NPA, NBFCs will be required to identify incipient stress in the account by creating a sub-asset category viz. 'Special Mention Accounts' (SMA) with the three sub-categories as given in the table below :

1.1.2 The Reserve Bank of India has set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders as advised by the Bank in its Circular dated February 13, 2014 issued by the Department of Banking Supervision. All systemically important non-banking financial companies (NBFC-ND-SI), NBFCs-D and all NBFC-Factors, (Notified NBFCs, for short) shall be required to report the relevant credit information on a quarterly basis in the enclosed formats given in Annex II to CRILC once the XBRL reporting mechanism is established. Till then they shall forward the information to PCGM, Department of Banking Supervision, Reserve Bank of India, World Trade Centre, Mumbai - 400 005 in hard copy. The data includes credit information on all the borrowers having aggregate fund-based and non-fund based exposure of Rs.50 million and above with them and the SMA status of the borrower. The Notified NBFCs shall be ready with the correct PAN details of their borrowers having fund based and / or non-fund based exposure of Rs.50 million and above duly authenticated from Income Tax records.

1.1.3 Individual notified NBFCs shall closely monitor the accounts reported as SMA-1 or SMA-0 as these are the early warning signs of weaknesses in the account. They should take up the issue with the borrower with a view to rectifying the deficiencies at the earliest. However, as soon as an account is reported as SMA-2 by one or more lending banks / notified NBFCs, this will trigger the mandatory formation of a Joint Lenders' Forum (JLF) and formulation of Corrective Action Plan (CAP) 2 as envisioned in Para 2.3 of the Framework. Notified NBFCs must put in place a proper Management Information and Reporting System so that any account having principal or interest overdue for more than 60 days gets reported as SMA-2 on the 61st day itself in the format given in Annex III, in hard copy to PCGM, Department of Banking Supervision, Reserve Bank of India, World Trade Centre, Mumbai - 400 005. NBFCs shall endeavour to put in place an XBRL reporting framework at the earliest.

1.2 Accelerated Provisioning

1.2.1 In cases where NBFCs fail to report SMA status of the accounts to CRILC or resort to methods with the intent to conceal the actual status of the accounts or evergreen the account, NBFCs will be subjected to accelerated provisioning for these accounts and / or other supervisory actions as deemed appropriate by RBI. The current provisioning requirement and the revised accelerated provisioning in respect of such non performing accounts are as under :

1.2.2 Further, any of the lenders who have agreed to the restructuring decision under the CAP by JLF and is a signatory to the Inter Creditor Agreement (ICA) and Debtor Creditor Agreement (DCA), but changes their stance later on, or delays / refuses to implement the package, will also be subjected to accelerated provisioning requirement as indicated above, on their exposure to this borrower i.e., if it is classified as an NPA. If the account is standard in those lenders' books, the provisioning requirement would be 5%. Further, any such backtracking by a lender might attract negative supervisory view during Supervisory Review and Evaluation Process.

1.2.3 Presently, asset classification is based on record of recovery at individual NBFCs and provisioning is based on asset classification status at the level of each NBFCs. However, if lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated time frame, the account will be subjected to accelerated provisioning as indicated above, if it is classified as an NPA. If the account is standard in those lenders' books, the provisioning requirement would be 5%.

1.3 "Non-Co-operative borrowers"

1.3.1 All Notified NBFCs shall identify "non-co-operative borrowers". A "non-co-operative borrower" is defined as one who does not provide necessary information required by a lender to assess its financial health even after 2 reminders; or denies access to securities etc. as per terms of sanction or does not comply with other terms of loan agreements within stipulated period; or is hostile / indifferent / in denial mode to negotiate with the NBFC on repayment issues; or plays for time by giving false impression that some solution is on horizon; or resorts to vexatious tactics such as litigation to thwart timely resolution of the interest of the lender/s. The borrowers will be given 30 days' notice to clarify their stand before their names are reported as non-cooperative borrowers.

1.3.2 With a view to discouraging borrowers / defaulters from being unreasonable and non-cooperative with lenders in their bonafide resolution / recovery efforts, NBFCs may classify such borrowers as non-cooperative borrowers, after giving them due notice if satisfactory clarifications are not furnished. Notified NBFCs will be required to report classification of such borrowers to CRILC. Further, NBFCs will be required to make higher / accelerated provisioning in respect of new loans / exposures to such borrowers as also new loans / exposures to any other company promoted by such promoters / directors or to a company on whose board any of the promoter / directors of this non-cooperative borrower is a director. The provisioning applicable in such cases will be at the rate of 5% if it is a standard account and accelerated provisioning, if it is an NPA. This is a prudential measure since the expected losses on exposures to such non-cooperative borrowers are likely to be higher.

2. Board Oversight

2.1 The Board of Directors of NBFCs will take all necessary steps to arrest the deteriorating asset quality in their books and should focus on improving the credit risk management system. Early recognition of problems in asset quality and which resolution envisaged in the Framework requires the lenders to be proactive and make use of CRILC as soon as it becomes functional.

2.2 Boards should ensure that a policy is put in place for timely provision of credit information to and access to credit information from CRILC, prompt formation of JLFs, monitoring the progress of JLFs and periodical review of the above policy.

3. Credit Risk Management

3.1 Notified NBFCs should carry out their independent and objective credit appraisal in all cases of lending and must not depend on credit appraisal reports prepared by outside consultants, especially the in-house consultants of the borrowing entity. They should carry out sensitivity tests / scenario analysis, especially for infrastructure projects, which should, inter alia, include project delays and cost overruns. This will aid in taking a view on viability of the project at the time of deciding Corrective Action Plan (CAP). NBFCs should ascertain the source and quality of equity capital brought in by the promoters / shareholders. Multiple leveraging, especially, in infrastructure projects, is a matter of concern as it effectively camouflages the financial ratios such as Debt / Equity ratio, leading to adverse selection of the borrowers. Therefore, NBFCs should ensure at the time of credit appraisal that debt of the parent company is not infused as equity capital of the subsidiary / SPV.

3.2 While carrying out the credit appraisal, notified NBFCs should verify as to whether the names of any of the directors of the companies appear in the list of defaulters by way of reference to DIN / PAN etc. Further, in case of any doubt arising on account of identical names, NBFCs should use independent sources for confirmation of the identity of directors rather than seeking declaration from the borrowing company.

3.3 In addition to the above, notified NBFCs are advised that with a view to ensuring proper end-use of funds and preventing diversion / siphoning of funds by the borrowers, NBFCs could consider engaging their own auditors for such specific certification purpose without relying on certification given by borrower's auditors. However, this cannot substitute NBFC's basic minimum own diligence in the matter.

5. Purchase / Sale of Non-Performing Financial Assets to Other Banks / FIs / NBFCs

5.1 DBOD Circular on Guidelines on Sale / Purchase of Non-Performing Financial Assets' (also applicable to NBFCs) as consolidated and updated in DBOD Master Circular 'Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances', inter-alia, prescribes the following :

A non-performing asset in the books of a bank shall be eligible for sale to other banks only if it has remained a non-performing asset for at least two years in the books of the selling bank. A non-performing financial asset should be held by the purchasing bank in its books at least for a period of 15 months before it is sold to other banks

5.2 In partial modification to the above, it is advised that NBFCs will be permitted to sell their NPAs to other banks / FIs / NBFCs (excluding SCs / RCs) without any initial holding period. However, the non-performing financial asset should be held by the purchasing bank / FI / NBFC in its books at least for a period of 12 months before it is sold to other banks / financial institutions / NBFCs (excluding SCs / RCs). The extant prudential norms on asset classification of such assets in the books of purchasing banks / FIs / NBFCs will remain unchanged.

List of Circulars

1 Details in DNBS(PD).CC.No.15/02.01/2000-2001 dated June 27, 2001

2 Details in DNBS.(PD).CC.No.27/02.05/2003-04 dated July 28, 2003

3 Details in DNBS. (PD).C.C.No.28/02.02/2002-03 dated July 31 ,2003 , DNBS.(PD).CC.No.37/02.02/2003-04 dated May 17, 2004 ]

4 Details in DNBS(PD)CC.No.259/03.02.59/2011-12 dated March 15, 2012

5 Details in DNBS.(PD).C.C.No.38/02.02/2003-04 dated June 11, 2004 , DNBS. (PD).CC.No.49/02.02/2004-05 dated June 9, 2005

6 Details in DNBS.PD/C.C.No.105/03.10.001/2007-08@ dated July 31, 2007]@ Actual Circular Number should be DNBS.PD/C.C.No.96/03.10.001/2007-08

7 Details in DNBS.(PD).CC.No.11/02.01/99-2000 dated November 15, 1999

8 Details in DNBS. (PD).C.C.No.47/02.01/2004-05 dated February 07, 2005

9 Details in DNBS. (PD).C.C.No.87/03.02.004/2006-07 dated January 4, 2007

10 Details in DNBS.PD/C.C No.109/03.10.001/2007-08 dated November 26, 2007

11 Inserted vide DNBS (PD) CC No. 353/ 03.10.042 / 2013-14 dated July 26, 2013

12 Inserted vide DNBS (PD) CC.No.373/03.10.01/2013-14 dated April 7, 2014

13 As defined in 'Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012'

14 Details in DNBS. (PD).C.C.No.124/03.05.002/2008-09 dated July 31, 2008 and DNBS.PD/CC.No.142/03.05.002/2008-09 dated June 9, 2009

15 Details are in DNBS.PD.CC.No.161/3.10.01/2009-10 dated September 18, 2009

16 Details are in DNBS(PD) C.C.No.174/03.10.001/2009-10 dated May 6, 2010

17 Inserted vide DNBS.CC.PD.No.191/03.10.01/2010-11 dated July 27, 2010

18 Inserted vide DNBS.(PD).CC.No.195/03.10.001/2010-11 dated August 09, 2010

19 Inserted vide DNBS.(PD).CC.No.195/03.10.001/2010-11 dated August 09, 2010

20 Inserted vide DNBS.(PD).CC.No.200/03.10.001/2010-11 dated September 17, 2010

21 Inserted vide DNBR.(PD).CC.No.015/03.10.001/2014-15 dated January 28, 2015

22 Inserted vide DNBS(PD).CC.No.407/03.10.01/2014-15 dated August 20, 2014

23 Inserted vide DNBR.(PD).CC.No.019/03.10.001/2014-15 dated February 06, 2015

24 Inserted vide DNBS(PD).CC.No.248/03.10.01/2011-12 dated October 28, 2011

25 Details in DNBS(PD).CC.No.245/03.10.42/2011-12 dated September 27, 2011

26 Details in DNBS.CC.PD.No.253/03.10.01/2011-12 dated December 26, 2011

27 Inserted vide DNBS. PD. No. 301/3.10.01/2012-13 dated 21.8.12

28 Inserted vide DNBS. PD. No. 372/3.10.01/2013-14 dated 24.3.14

29 Inserted vide DNBS.PD/CC.NO.308/03.10.001/2012-13 dated 6.11.12

30 Inserted vide DNBS.PD.CC.No.317/03.10.001/2012-13 dated 20.12.12

31 Inserted  vide DNBS.PD/CC.No 359/03.10.001/2013-14 dated November 06, 2013

32 Inserted vide DNBS(Inf.).CC. No 309/24.01.022 /2012-13 dated 8.11.12

33 Inserted vide DNBS.CC.PD.No. 312 /03.10.01/2012-13 dated 7.12.13

34 Inserted vide DNBS(PD)CC.NO 330/03.10.01/2012-13 dated June 27, 2013

35 Inserted vide DNBS(PD)CCNo.349/03.10.001/2013-14 dated July 02, 2013

36 Inserted vide DNBS.(PD).CC.No 360/03.10.001/2013-14 dated November 12, 2013

37 Inserted vide DNBS.(PD).CC.No.371/03.05.02/2013-14 dated March 21, 2014

38 Inserted vide DNBS (PD) CC.No.371/03.05.02/2013-14 dated March 21, 2014

39 DNBS (PD) CC.No.377/03.10.001/2013-14 dated May 27, 2014 Foot Note: The reference to Companies Act, 1956 in the Master Circular will be changed as and when change is effected in the original circulars/notifications.

40 Inserted vide DNBS(PD) CC.No 349/03.10.001/2013-14 dated July 02, 2013

41 Inserted vide DNBS(PD) CC.No 349/03.10.001/2013-14 dated July 02, 2013

42 Inserted vide DNBS(PD) CC No. 349/03.10.001/2013-14 dated July 02, 2013

43 Inserted vide DNBS(PD)CC.No 349/03.10.001/2013-14 dated July 02, 2013

44 Inserted vide DNBS.(PD).CC.No.371/03.05.02/2013-14 dated March 21, 2014

• Submission Guidelines

Securitization and Direct Assignment Transactions in the Indian Economy

[ Vineet Ojha is Manager – IFRS & Valuation Services at Vinod Kothari Consultants Pvt Ltd]

The current financial year has witnessed a sharp surge and a life time high in the volume of securitization and direct assignment transactions in the Indian economy. Consequent to the funding problems that non-banking finance companies (NBFC) and housing finance companies (HFCs) have been facing over the last few months, direct assignments of retail portfolios have picked up considerable pace, with volumes touching an all-time high of Rs. 1.44 lakh crore during the nine-month period (April-December) of financial year 2019 (FY 19). Of this, around Rs. 73,000 crore was raised by NBFCs and HFCs through sell-down of their retail and small and medium enterprises (SME) loan portfolio to various investors (primarily banks). Investor appetite, particularly from public sector banks and private banks, is high at present, considering investors are not exposed to entity-level credit risk, and are seen taking exposure to the underlying pool of retail and SME borrowers. Yields have gone up significantly with the changing market dynamics. The momentum in the securitization market is likely to remain strong in the current fiscal as it is emerging as an important tool for retail-focused NBFCs for raising funds at reasonable costs while simultaneously providing a hedge against asset-liability mismatches. A visual trend of the market over the years can be seen below:

Source: India Securitization Market: Booklet by VKCPL

Why the sudden surge?

Looking at the figure above, we can see a sharp surge in the direct assignment volumes in FY19. A majority of the issuances comes from the third quarter with around Rs. 73,000 crores. Although the major driver is the Infrastructure Leasing and Financial Services Limited (IL&FS) imbroglio, it is not the only reason for this development.

IL&FS crisis

Following the IL&FS crisis, the Reserve Bank of India (RBI) has time and again prompted banks to assist NBFCs to recover from the cash crunch. However, wary of the credit quality of the NBFCs and HFCs, the banks have shown more interest in the underlying loan portfolios than on the originator itself. Through direct assignment and securitization, these institutions get upfront cash payments against selling their loan assets. This helps these institutions during the cash crunch. Funds raised by NBFCs and HFCs through this route helped the financiers meet sizeable repayment obligations of the sector in an otherwise difficult market.

RBI relaxes MHP norms for long tenure loans

Another reason that explains this sudden surge in the volume of direct assignment or securitization volumes is the relaxation of the minimum holding period (MHP) criteria for long-tenure loans by the RBI. This increased the quantum of assets eligible for securitization in the system. The motivation was the same is to encourage NBFCs and HFCs to securitize their assets to meet their liquidity requirements. More details about this can be found here.

Effects of Securitization

Primarily, priority sector lending (PSL) requirements were the primary drivers for securitization. The number of financial institutions participating in securitization were quite low. Now, for liquidity concerns, NBFCs and HFCs were forced to rely on securitization to meet their liquidity needs. This not only made them explore a new mode of funding, but also solved other problems like asset liability mismatches. In the nine months of FY19 and FY18, the share of non-PSL transactions has increased to 35 per cent compared to 24 per cent in FY17 and less than 20 per cent in the periods prior to that.

However, it is not a rosy picture all over. Due to the implementation of IFRS, upon de-recognition of a loan portfolio from the financial statements of the company, the seller shall have to recognize a gain on sale on the transaction. These gains disturb the stability of the profit trend in these financial institutions which would result in volatile earnings in their statements. The NBFCs have been trying to figure out solutions which would allow them to spread the gain on transfer over the life of the assets instead of booking it upfront.

The securitization market remained buoyant in the third quarter driven by the prevailing liquidity crisis following defaults by IL&FS and its subsidiaries. This surge is good for the Indian securitization market as India’s contribution to global securitization market, at about USD 12 billion, is barely recognized, for two reasons – firstly, India’s market has so far been largely irrelevant for the global investors, and secondly, bulk of the market has still been driven by PSL requirements. PSL-based securitizations obviously take place at rates which do not make independent economic sense. Now due to the surge in non-PSL based securitization, the rates at which the portfolios are sold are attractive to investors. This could attract global investors to the market.

Now that financial institutions have gained exposure to the securitization markets, they find that the transactions are attractive for sellers as well as investors. Our interaction with leading NBFCs reveals that there are immediate liquidity concerns. Banks are not willing to take on-balance sheet exposure on NBFCs; rather they are willing to take exposure on pools. Capital relief and portfolio liquidity are additional motivations for the originators (and other potential investors) to enter into securitization transactions.

– Vineet Ojha

About the author

Add comment

Cancel reply.

Save my name, email, and website in this browser for the next time I comment.

Notify me of follow-up comments by email.

Notify me of new posts by email.

Invoking India’s Money Laundering Regime for Environmental Crimes: Impact on Businesses

Data-protection in the international arbitration regime.

• ‘Beneficial Owner’ is not a ‘Related Party’ under the IBC

The Unavailability of Writ Jurisdiction for Interference with One-Time Settlements

SUBSCRIBE TO BLOG VIA EMAIL Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages

• Supreme Court on the Regularization of Temporary Employees
• A Stamp Paper – What Good is it Beyond Six Months?
• SEBI’s Order in the DLF Case: A Summary
• Section 14, SARFAESI Act: Settling A Jurisdictional Conundrum
• Foreign Jurisdiction Clauses in Commercial Contracts: An Indian Perspective
• Termination of Worker For ‘Loss of Confidence’ Does Not Amount To Retrenchment
• Creditors with Rejected Claims: Methods to Address Inadequacies under the IBC
• Validity of Employment Bonds in India

Recent Comments

• Umakanth Varottil on Supreme Court Invokes Article 142 to Permit Withdrawal of CIRP
• Araz Mirbavandi on Supreme Court Invokes Article 142 to Permit Withdrawal of CIRP
• Hari Prakash on Guest Post: Reduction of Provident Fund Contributions to Statutory Limits
• Adv Ragav on Secondment Taxation and the Northern Operating Systems Case
• Suchith on Coffee Plantations under SARFAESI: A Bitter Brew

Social Media

• View @IndiaCorpLaw’s profile on Twitter

Assignment Of Loan

Jump to section, what is an assignment of loan.

Under an assignment of loan, a lender (the assignor) assigns its rights relating to a loan agreement to a new lender (the assignee). Only the assignor's rights under the loan agreement are assigned. The assignor will still have to perform any obligations it has under the facility agreement.

The debtor, the recipient of the loan, must be notified when a debt is assigned. When there is an assignment of a loan, a Notice of Assignment (NOA) is sent out to the debtor informing them that a new party is now responsible for collecting any outstanding amount.

Assignment Of Loan Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.14 5 dex1014.htm ASSIGNMENT OF LOAN DOCUMENTS , Viewed October 21, 2021, View Source on SEC .

Who Helps With Assignment Of Loans?

Lawyers with backgrounds working on assignment of loans work with clients to help. Do you need help with an assignment of loan?

Post a project  in ContractsCounsel's marketplace to get free bids from lawyers to draft, review, or negotiate assignment of loans. All lawyers are vetted by our team and peer reviewed by our customers for you to explore before hiring.

Meet some of our Assignment Of Loan Lawyers

Robert is a sixth-generation Tennessean and part of a long line of Tennessee attorneys: There has been a Marks attorney in Tennessee since 1856. In 1929, Robert’s great-grandfather established an event venue, Shadowbrook, which Robert has worked at his entire life, including managing for 10 years. He knows what business owners are dealing with—especially venue owners—because he has dealt with it. While Robert loves the hospitality industry, he pursued his passion. In 2016, Robert decided to attend law school and continue managing the business. He thrived. He was a founding member of the Nashville School of Law's Legal Aid Society, received the Tennessee Supreme Court’s Law Student for Justice award, and interned with the Tennessee Supreme Court's Access to Justice Commission. Before co-founding Mercury Legal Group, Robert focused on estate planning in solo practice. In this role, he helped clients protect what they had spent a lifetime building. Now he helps his clients build their businesses by providing tailored legal services.

Hi, my name is O.T. and I own The Walker Collective, a law firm that caters to the contractual, intellectual property, and business formation needs of creative entrepreneurs and small business owners. I am licensed to practice in Maryland and New York.

Amber Masters has over 9 years of experience as a contracts attorney, helping small businesses with an array of agreements, such as purchase agreements, master service agreements, and employment contracts. She has an extensive background in employment agreements for dentists, doctors, and other health care professionals. She is a highly rated and acclaimed estate planning attorney and personal finance expert, who has been featured on CNBC, NBC, and Yahoo Finance. She successfully launched and sold a fintech startup and can empathize with the issues small and mid-size businesses face. Licensed in Oklahoma and Arizona.

Ms. Ayub is an attorney licensed to practice in Texas. Before moving to the US, she has a number of years of experience in contract review, analysis and drafting. Ms. Ayub is available to help you with your legal problems, as well as filling LLC and other business entity formation documents. To know more about her practice, please visit https://ayublawfirmpllc.com/.

Jason has been providing legal insight and business expertise since 2001. He is admitted to both the Virginia Bar and the Texas State Bar, and also proud of his membership to the Fellowship of Ministers and Churches. Having served many people, companies and organizations with legal and business needs, his peers and clients know him to be a high-performing and skilled attorney who genuinely cares about his clients. In addition to being a trusted legal advisor, he is a keen business advisor for executive leadership and senior leadership teams on corporate legal and regulatory matters. His personal mission is to take a genuine interest in his clients, and serve as a primary resource to them.

For over 20 years, as an attorney and real estate broker, Candace has used her passion for business and real estate to help her clients succeed as business owners, entrepreneurs Realtors, and real estate investors. She and her team go above and beyond to simplify and solve those issues which trouble her clients. From the simple to the complex, she is ready to help. Her experience includes, Real Estate law, Contracts, Business Formation, Business Operating AGreements and Entrepreneurial counseling.

I have dedicated my professional career and practice to Federal Government Procurement Law. My practice includes experience as an Army JAG who specialized in Government Procurement Law who represented contracting commands and requiring activities both deployed and in the United States and now as a civilian attorney who represents clients in all aspects of Federal Government Procurement Law. My clients are people and firms that are developing technology through the SBIR/STTR programs, OT's, and businesses using Small Business Administration (SBA) contracting programs.

Find the best lawyer for your project

How it works.

Post Your Project

Get Free Bids to Compare

Hire Your Lawyer

Financial lawyers by top cities

• Austin Financial Lawyers
• Boston Financial Lawyers
• Chicago Financial Lawyers
• Dallas Financial Lawyers
• Denver Financial Lawyers
• Houston Financial Lawyers
• Los Angeles Financial Lawyers
• New York Financial Lawyers
• Phoenix Financial Lawyers
• San Diego Financial Lawyers
• Tampa Financial Lawyers

Assignment Of Loan lawyers by city

• Austin Assignment Of Loan Lawyers
• Boston Assignment Of Loan Lawyers
• Chicago Assignment Of Loan Lawyers
• Dallas Assignment Of Loan Lawyers
• Denver Assignment Of Loan Lawyers
• Houston Assignment Of Loan Lawyers
• Los Angeles Assignment Of Loan Lawyers
• New York Assignment Of Loan Lawyers
• Phoenix Assignment Of Loan Lawyers
• San Diego Assignment Of Loan Lawyers
• Tampa Assignment Of Loan Lawyers

related contracts

• Accredited Investor Questionnaire
• Adverse Action Notice
• Bridge Loan
• Bridge Loan Contract
• Collateral Assignment
• Commercial Loan
• Convertible Bonds
• Convertible Note
• Convertible Preferred Stock
• Cumulative Preferred Stock

other helpful articles

• How much does it cost to draft a contract?
• Do Contract Lawyers Use Templates?
• How do Contract Lawyers charge?
• Business Contract Lawyers: How Can They Help?
• What to look for when hiring a lawyer

Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.

Contracts Counsel was incredibly helpful and easy to use. I submitted a project for a lawyer's help within a day I had received over 6 proposals from qualified lawyers. I submitted a bid that works best for my business and we went forward with the project.

I never knew how difficult it was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control. Thank you so much and should I ever need attorney services down the road, I'll certainly be a repeat customer.

I got 5 bids within 24h of posting my project. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations.

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Find lawyers and attorneys by city

• Sales CRM Software
• Application Portals
• Call Center CRM
• Mobile CRM App
• Omnichannel Communication CONVERSE
• Reporting Dashboard SIERA
• Lead Management System
• Opportunity Management
• Sales Process Automation
• Sales Tracking
• Door-to-Door Sales
• Remote Team Management
• Field Sales CRM
• Merchant Onboarding App
• App UI/UX Customizer CASA
• Outside Sales CRM
• Field Force Automation
• Collections Management
• Field Force Tracking
• Event Campaign Management
• Bancassurance Management
• Marketing Automation
• Chatbot - Website
• Chatbot - WhatsApp
• Landing Pages
• Email Campaigns
• Lead Capture Automation
• Lead Engagement
• BTL Marketing Automation
• Advanced Marketing Analytics
• Hospitals and Clinics
• Hospice and Palliative Care
• Fertility Clinics
• Dental Care
• Diagnostics Labs
• ACQUISITION
• Patient Intake Automation
• Patient Appointment Scheduling
• Healthcare Call Center Solution
• Patient Experience Management
• Self-serve Patient Portals
• EHR Integration
• Physician Empanelment
• Security and Compliance
• Patient Engagement
• Higher Education
• Pre-schools and K12
• Training Institutions
• Overseas Education
• Student Recruitment Software
• Admission Portal
• Teacher Onboarding
• Publisher Portal
• Admission Software
• Credit Unions
• Securities and Trading
• Lending CRM
• Loan Origination System
• WhatsApp Lending Bot
• Debt Recovery Automation
• Bancassurance Solution
• PAPERLESS ONBOARDING
• e-KYC Solution
• Video KYC Solution
• Merchant Onboarding
• Merchant Lifecycle Management
• Travel and Hospitality
• Agriculture
• Home Improvement
• View by Industries
• Co-Lending Model: Key to Winning New Market Share

In the past few months, the Indian lending ecosystem has witnessed many new pacts between banks and NBFCs. Experts believe that these co-lending/co-origination pacts will help lenders improve their credit outreach and significantly extend accessibility for many underserved borrowers in the country. 

According to a report by the Association of Chartered Certified Accountants (ACCA), the Indian MSME segment faces a credit deficit of nearly $240 Bn.

(Source: https://accaindia.co.in/contenthub/Articles/images/ACCA_june.pdf)

Another emerging challenge to Indian lenders was highlighted by the Chairman of SBI, Mr. Dinesh Khara , when he called on the banking sector to increase their green lending activities to invest in sectors like renewable energy and sustainable infrastructure, while simultaneously helping other sectors like agriculture, to mitigate the effects of climate change.

To address the challenge of the rising credit gap within the underserved economy, RBI has introduced this new model of partnership between banks and NBFCs.

In this article, we will decode the Co-Lending Model (CLM) and why it can become a key to winning more market share for Indian lenders.

What is Co-lending?

Co-lending is an arrangement where banks and non-banks (NBFCs) can form agreements and engage in priority sector lending.

In India, RBI proposed a framework for co-lending, known as the co-lending model (CLM), in 2020. According to the  master directions from RBI , financial institutions must direct 40% of all lending activities towards priority sectors as they contain many credit-starved borrowers. The list includes:

• Export Credit
• Social Infrastructure
• Renewable Energy

Although Indian banks have ample funds and can offer loans at significantly lower rates, stringent regulations and poor outreach infrastructure hamper their ability to extend credit to the unorganized segments (that also contain many borrowers in these priority sectors). NBFCs, on the other hand, due to their agile nature and less stringent regulation, enjoy greater penetration into the market.

While NBFCs usually have agile frameworks, they can still suffer from liquidity crises.

An example of such a situation was the 2018 IL&FS crisis. It was fueled primarily by the lack of asset and liability management (ALM).

The crisis was a wake-up call for many NBFCs to create an adequate pool of credit. Additionally, to ensure that there aren’t any future liquidity crises, RBI in 2019 issued guidelines for all NBFCs to build a Liquidity Risk Management Framework. It would create a more regulated flow of credit and would result in improved credibility of NBFCs.

In this next section, you will find out about requirements for banks and NBFCs to enter into the CLM.

How does co-lending work?

Banks and NBFCs were forming pacts to pursue new markets well before the introduction of CLM. Previously, RBI had released a notification on 21st Sept 2018 titled  ‘ Co-origination of loans by Banks and NBFCs for lending to priority sector ‘ highlighting rules and regulations for the parties involved in co-lending.

On 5th Nov 2020, RBI released another notification titled  ‘ Co-Lending by Banks and NBFCs to Priority Sector ‘ that served as a revision to the 2018 directions. 

Under this new version, all NBFCs (including HFCs) can enter co-lending pacts with partner banks. RBI mandated that some bank categories under Scheduled Commercial Banks (SCBs) cannot enter co-lending pacts with NBFCs. These banks include:

• Regional Rural Banks (RRBs)
• Small Finance Banks (SFBs)
• Urban Co-operative Banks (UCBs)
• Local Areas Banks (LABs) 

Here’s what you need to know about CLM 

• The bank/NBFC involved must formulate a board-approved policy that shall contain all the details regarding the exercise. The master agreement must be audited periodically, internally, and externally. The agreement must ensure adherence to the laid-out guidelines. Also, banks shall not enter a co-lending arrangement with any NBFC belonging to their promoter group. 
• 80% of the total credit risk under this model shall be on the bank’s loan book and the NBFC should bear the rest 20% of the risk. While engaging in the activity,  inter-alia , the partner bank must adhere to the outsourcing guidelines and not outsource its part of the credit sanction to the NBFC.
• The participants will pool all their funds required for lending activity within an escrow account – same for repayment.
• During the formulation of the master agreement, the bank can choose to mandatorily take their share of loans and conduct the required due diligence to check if the prospective borrower matches their risk appetite or not. Banks must conduct the screening in adherence to all EKYC and AML guidelines laid out by the RBI.
• The other arrangement is for the NBFC to disburse 100% of the loan amount and then present the case to the bank. The bank can then ‘ cherry-pick ‘ these cases and finance them accordingly. This arrangement will be akin to a  direct assignment transaction . The partner bank must adhere to the terms mentioned in the guidelines on Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities while taking the loans in its portfolio.
• A co-lender can assign loans to a third party only with consent of the other partner lenders.

Also, at any time:

• The NBFC must have the ability to generate a unified statement for any customer via the appropriate information sharing mechanisms with the partner bank.
• The interest rates charged to the borrowers will be all-inclusive interest. It means that the partner bank/NBFC can mutually decide, and charge interest based on their risk appetite.
• The lenders must disclose all the details of their arrangement upfront to the customer and take explicit consent before signing them up.
• Lenders must set up a robust grievance redressal mechanism. Any complaints against the participating entities must be resolved within 30 days. If not addressed, the borrower can escalate the issue with the concerned Banking Ombudsman/Ombudsman for NBFCs or the Customer Education and Protection Cell (CEPC) in RBI.
• Both the banks and the NBFCs must create and implement a business continuity plan to ensure uninterrupted service to their borrowers till repayment of the loans under the co-lending agreement or in the event of termination of co-lending arrangement between the co-lenders.

What are the challenges associated with CLM?

Although CLM has many benefits, there are a few challenges in the model that can reduce its efficacy. For instance, there are challenges in the way banks can undertake loans from NBFCs. We earlier mentioned that it can be done in either two ways:

• By mandatorily taking their share of loans per the guidelines from the Master agreement from the partner NBFCs and then conducting due diligence
• By choosing their share per convenience from the basket of loans that the NBFCs have financed already

If we go by the first approach, there lies a risk in increasing the overall timeline of the journey. While banks can, in theory, rely upon the NBFCs to perform required checks. But if they choose to conduct these checks themselves with their relatively stricter due diligence (which banks prefer usually to avoid bad loans), it can overturn the advantages that NBFCs bring to this partnership.

In the second approach wherein the loan takeover by the partner bank is akin to digital assignment transaction, there are many aspects that pose operational challenges for the model. In order for this partnership to become successful, banks must address these challenges first. Some of these include – adherence to direct assignment guidelines, security creation and recovery, the takeover of loans and credit enhancement.

Thus, both the partner bank and NBFC will have to shape their policies in a way to maximize the flexibility of this arrangement while keeping in mind the convenience of the borrower.

What are the benefits of CLM?

CLM brings many benefits to the lending ecosystem. For example,

• It helps improve the relationship between banks and NBFCs.
• Creates a room for NBFCs to raise funds swiftly.
• Allows banks to enjoy greater flexibility while allocating more funds to underserved markets.
• Provide greater operational flexibility and bring down the loan interest rates to increase access to credit for millions of underbanked borrowers.
• Allow HFCs to enter co-origination pacts with banks (note that this was not allowed in the 2018 version of the co-origination framework).
• Borrowers can enjoy competitive interest rates, highly affordable loans, and access to higher loan amounts.

How can Digital improve the efficacy of CLM?

Over the last two years, India’s digital infrastructure has seen many innovations such as UPI, Digi-locker, e-KYC , e-Sign, OCEN, Account Aggregators, and more that have vastly improved the odds of success for CLM.

Now, the overall efficacy of CLM depends on the achievement of KPIs such as increasing the accuracy of credit profiling, lowering the cost of borrowing, faster TATs, minimal credit risk, higher operational flexibility, convenient repayment schedule, and more. A robust digital stack can help co-lenders create a truly paperless process that will significantly bring down the overall application processing time.  

For example, LeadSquared hosts many capabilities to support co-lending needs such as:

• One time API integration to simplify the flow of data between multiple lending partners
• Rich data analytics and reporting  to give you a 360-degree view into the customer lifecycle journey
• A  Workflow Builder  to build highly flexible and agile borrower journeys in just a few clicks
• Straight Through Processing  (STP) for an end-to-end automated and completely paperless journey
• Partner Onboarding and Management for a seamless co-lending experience
• A robust Debt Recovery platform to minimize loan delinquencies and maximize collections
• Pre-screening functionality  with checks such as Aadhar, PAN, CIBIL, Experian, and more

For example, Profectus Capital , a leading Indian NBFC was able to increase its funnel quality by over 70% using pre-screening capabilities offered by LeadSquared. Also, they were able to achieve 60% higher process efficiency and optimize their spending on DSAs by nearly 55%.

A robust tech stack will ensure that banks and NBFCs can make the most of their co-lending partnership and maximize the financial inclusion of the Indian borrowers.

Before we wrap up, let us look at some of the co-lending pacts signed in 2021. 

List of Co-Lending pacts signed in 2021

2021 saw many banks (majorly public sector) and NBFCs come together to bridge the credit gap in the underserved segment.  Housing finance  and SME finance deals comprise nearly half of all new deals made in 2021. Here’s the list of the co-lending deals in 2021 so far. 

Co-lending Deals Between Banks and HFCs

• Yes Bank – PNB Housing Finance
• Yes Bank – Indiabulls Housing Finance
• Central Bank of India – Indiabulls Housing Finance
• Central Banks of India – IIFL Home Finance
• Indian Bank – Indiabulls Housing Finance
• Indian Bank – IIFL Home Finance
• Punjab National Bank – IIFL Home Finance
• Punjab & Sind Bank – Indiabulls Home Finance

Co-lending Deals Between Banks and SME Finance NBFCs

• Bank of Baroda – U GRO Capital
• IDBI Bank – U GRO Capital
• Bank of India – MAS Financial Services

Other Co-lending Deals

• SBI – Paisalo Digital
• Yes Bank – WheelsEMI
• SBI – Vedika Credit Credit Capital Ltd. 
• Indian Bank- Indiabulls Commercial Credit
• SBI- Save Microfinance
• Karur Vysya Bank – Chola Financial Services
• IndusInd Bank – Indel Money
• Prest Loans – U GRO Capital
• MAS Financial Services – CredAvenue
• Zip Loan – U GRO Capital

There is a rising credit demand in priority sectors that needs to be addressed.

The formalized framework of CLM supports and enables banks and NBFCs to cooperate and enjoy many benefits that were not available to them previously like greater penetration and swift access to funds.

By introducing CLM, RBI has already taken a positive step towards complete financial inclusion. It is now up to the lenders on how they can make this a successful initiative.

To make the most of their CLM partnerships, lenders must implement the right policies and use digital lending tools for agile operations.

To understand how  LeadSquared Lending CRM  can help supercharge your co-lending process.

There are multiple ways by which NBFCs can raise funds. Here are a few: – Loans from banks – usually long term but low-interest loans – Raise funds via Non-convertible Debentures (NCDs) – Via Foreign Direct Investment (FDI) – By issuing commercial paper for short term loans – By co-lending with banks – Through Bonds – By securitization of assets

Sectors in the market that do not receive adequate and timely credit are classified as Priority Sectors by the RBI. Any lending activity to these sectors falls under Priority Sector Lending. Since these are heavily underserved/underbanked, RBI has mandated Indian Banks to direct 40% of all lending activities into them. A few examples of such sectors are Agriculture, Education, Renewable Energy, MSMEs, Housing, etc.

Mayank is a Product Marketer at LeadSquared. He is always on the lookout for the latest financial trends that influence the global lending market. You can connect with him on LinkedIn or write to him at [email protected].

Table of Contents

• Share on Facebook
• Share on Twitter
• Share on WhatsApp
• Share on LinkedIn

Want to see LeadSquared in action?

• Customer Portal
• Performance Management
• Dev Platform LAPPS
• Help Portal
• Pricing SALES
• Pricing MARKETING
• Education CRM
• Healthcare CRM
• Insurance CRM
• Banking CRM
• Real Estate
• Marketplace CRM
• Manufacturing CRM
• What is CRM
• What is lead management
• What is vendor management
• What is sales management
• Case Studies
• Guides & Blogs
• Compare CRM
• CRM Glossary
• Sales Glossary
• Media & News

GET IN TOUCH

(+1) 732-385-3546 (US)

080-46971075 (India Sales)

080-46801265 (India Support)

62-87750-350-446 (ID)

• Legal & Compliance

• Business Business Topics Big Shots Startups Brand Games Juicy Scams Under Business
• Finance Finance Topics News Platter Tax Club Macro Moves Your Money Under Finance
• Invest Invest Topics Stock Market Financial Ratios Investor's Psychology Mutual Funds Under Invest

Trending Topics

Securitization- the lifeline of nbfcs.

Gaurja Newatia

Created on 19 Sep 2019

Wraps up in 6 Min

Read by 14.4k people

Updated on 10 Sep 2022

Non- Banking Finance Companies ( NBFC’s ) play a significant role in driving growth and development by providing financial services to Micro, Small and Medium Enterprises (MSME’s) most suited to their business model. They aim at promoting inclusive growth in the economy by extending credit in rural sectors and financially weaker sections of the society.

While NBFC’s can generate funding from a variety of avenues- mutual funds, insurance companies, bonds, commercial papers, etc., it is lending by banks through securitization which helps NBFC’s to remain in business.

Let us now learn what exactly is securitization and how it is a significant growth vehicle for NBFC's.

What is Securitization?

Securitization is a process where a pool of securities is bundled together and are given credit rating by an independent credit agency and then are sold to investors at a fixed coupon rate. Securitization, as the name suggests, involves the transformation of loans, which are a kind of illiquid assets into liquid assets. The underlying assets are generally secured loans such as home loans, automobile loans and unsecured loans like personal loans, etc.

It is a process by way of which an originator (bank) pools together its assets and then sells it to a Special Purpose Vehicle (SPV) – an entity specially created for the process of securitization which further sells it to investors.

To get a better understanding, consider the following example:

Suppose, a small bank ABC with an existing loan portfolio of 100 crores wants to raise a loan of 50 crores by monetizing its current assets.

The ABC bank will pool together 50 crores worth of loan which might contain thousands of loans and sells them to the SPV for cash.

The SPV then obtains credit ratings from an independent credit rating organization based on the future cash flow generated and the quality of the pooled amount.

Assuming the actual returns from the total loan book is 10%, and over the three years, due to the risk factor involved, the pooled amount is sold at 8.5%

The margin of 1.5% is used as maintenance charges by SPV and obligator(bank) who is responsible for collecting cash flows from the borrowers and transferring them to the investors.

Certificates are created worth 50 crores and are opened for investment. Once the issue is fully subscribed, the cash flows will be collected from the borrower and will be disbursed among the investors for three years.

The difference between what is charged from the borrowers (10.5%) and what is paid to the investors (8.5%) will be the servicing fee.

Parties in a Securitization Process:

Types of Securitised Products in India

Pass-Through Certificates (PTC's)

Pass-Through Certificates are similar to bonds, the difference being that they are issued against underlying securities. The payment to investors constitutes interest payments and principal payments received by the obligator on a pro-rata basis after deducting the servicing fee. However, in a Pay-Through Certificate, the principal and the interest amount is not transferred to the investor. Instead, the investors are issued new securities by SPV in return to this.

Direct Assignment

Direct Assignment involves buying a loan book at a fixed interest rate. Suppose a bank is interested in increasing his exposure to agricultural loan, to fulfill this, he will directly buy the pool of agrarian loan from an NBFC. Here, the terms are negotiable and can be customized in favor of both parties.

Why would banks be buyers?

• As per the Reserve Bank of India, banks need to lend to the “priority sector” (Table 1), which includes the following categories:
• Agriculture
• Micro, Small and Medium Enterprises (MSME)
• Export Credit
• Social Infrastructure
• Renewable Energy

                              Table 1: Priority Sector Lending Requirements

Banks do not necessarily want to be the originators of the loan while on the other hand, NBFC’s would like to sell their loans for the purpose of generating more cash and extending more credit. To fulfill the requirements of the RBI, banks go for buying NBFC's loans.

• Commercial Banks can lend only at Marginal Cost of Funds based Lending Rate (MCLR) plus some spread where the MCLR is fixed (can be changed only at monthly reset dates) for each and every customer, and only the spread is variable. However, NBFC's can charge various rates from customer i.e., Prime Lending Rates (PLR) plus spread. Here, both PLR and Spread are variable. Thus, banks here can take advantage of higher interest rate margins earned by NBFC's.  
• When the RBI goes for slashing of lending rates, while banks have to pass on the interest rate benefits, NBFC’s can choose not to pass on the interest rate benefits to the borrowers. Thus, even though there is a cut in lending rates, the securitized pool sold to the banks will yield the same amount of returns.  
• There are some sectors, for example, Real Estate, where banks cannot lend directly due to restrictions imposed by the RBI. In such cases, banks can expand their portfolio and take exposure in such sectors through NBFC's.  
• Thus, through securitization, banks take advantage of Interest Rate Arbitrage and by earning some additional money through investing in NBFC’s.

How does the risk get shared?

Securitization is an easy way out for NBFC's, to transfer their pool of illiquid assets to banks in order to convert them into tradeable securities. However, to ensure that NBFC's do bear some risk even after the Securitization Process, the concept of Minimum Retention Ratio (MRR) was brought forward. This means if a part of the loan pool goes into default, the first blow will be borne by the originator(NBFC's)

The RBI guideline dated November 29, 2018, states that loans which have an original maturity of 5years or above which receive six monthly installments or two quarterly installments, the MRR requirements would be 20% of the book value of the loans being securitised/20% of the cash flows from the assets assigned.

Why are banks shying away from securitization? What exactly are the risks associated with lending to NBFC’s?

There are two risks associated with lending to NBFC’s

Consider a situation where ABC bank lends to XYZ, which is an NBFC. XYZ further gives it to a company, say PQR. If PQR defaults on payment, then XYZ would not receive payment who also would not be able to pay ABC. This is the solvency risk or the default risk or credit risk.

Let us now understand how NBFC’s face Liquidity Risk.

NBFC’s issue commercial papers or non-convertible debentures for short term (3 months-1 years) to raise money from various mutual funds, banks, etc. The raised money is then used to extend loans to borrowers for the long term (5 years). This means that NBFC's will return lenders their money within three months but will receive money from the borrower after five years. 

Why do NBFC's resort to this practice?

Only because short-term loans are cheaper, and long-term loans are expensive, NBFC's take advantage of the situation and earn an interest rate margin.

Let us now understand how exactly this technique works well for NBFC's.

To make this system work well, NBFC's go for rollover. Say, for example, an NBFC owes payment to its lenders for commercial papers after three months. To ensure complete repayment without default, the NBFC will issue new commercial papers to another set of lenders. The raised money will then be used to repay the earlier lenders. This is the Rollover Strategy. This goes on and on to ensure liquidity.

However, what if NBFC fails to find this set of new lenders?

To repay its previous lenders, it will approach its borrower asking for repayment. But, the borrower won't be able to repay the NBFC since all of its money would be invested in his project. This situation gives rise to what is popularly known as the Liquidity Crisis.

The Liquidity Crisis in one NBFC creates a general perception that all NBFC’s are going to default on their payments, creating a kind of systematic risk i.e., when one party suffers, all the parties suffer. The IL&FS liquidity crisis is one suitable example in this context.

The recent liquidity crisis is going to impact the sentiments of particularly Mutual Funds since any default in interest, or principal payments would ultimately have to be borne by the investors. Thus, the only way to lift NBFC’s out of the crisis is securitization. Hence, it would not be wrong to call Securitization- The lifeline of the NBFC sector.

How was this article?

Like, comment or share.

An Article By -

0 Post Likes

Gaurja is a Business Economics Student|Finance Enthusiast|Avid reader|

Topics under this Article

Share your thoughts.

We showed you ours, now you show us yours (opinions 😉)

Why not start a conversation?

Looks like nobody has said anything yet. Would you take this as an opportunity to start a discussion or a chat fight may be.

Related Articles

More titbits on the go

What is the Annual Percentage Yield and How is it Calculated?

17 Oct 2023

Home loan interest rates: Pay for a house, not a coffin!

04 May 2023

HDFC Bank Vs ICICI Bank: The race to the top is on!

22 Apr 2022

35.3k views

What is Mortgage Loan?

21 Apr 2022

Under Invest

"A few" articles ain't enough! Explore more under this category.

Don’t Know How to Invest? Here’s the Ultimate Solution to Your Problems

30 Mar 2024

Is Your Portfolio Volatility-Proof? A Financial Stress Test

27 Mar 2024

How to Choose Between Value & Growth Stocks for More Returns?

22 Mar 2024

How to Find Best Value Stocks in India?

12 Mar 2024

Share this post

Or copy the link to this post -

https://insider.finology.in/investing/securitization-the-lifeline-of-nbfcs

🤩 Reading never goes out of fashion.

You need to login to continue. Let's take your love for reading to the next level with:

• Custom feed of your chosen topics.
• Personal library of Liked & Bookmarked articles.
• Live to & fro comments with Insider.

The Economic Times daily newspaper is available online now.

One-time gains: nbfcs seek change in accounting policy.

So far, non-bank lenders take a one-time gain on all loan sales to banks in direct assignment transactions. Prior to the implementation of Ind-AS accounting system, these gains were amortised over the life of the loan.

Read More News on

Download The Economic Times News App to get Daily Market Updates & Live Business News.

The surge in Indian pharma exports to the US has three simple explanations

Answered: Four critical questions on the proposed changes in PF wage ceiling

Why Bitcoin won’t be the same three days from now

Ather is riding on these five factors to break TVS, Ola’s e-scooter dominance

Jittery equities: Five things that can spook bulls and how you can navigate them.

Answered: Five questions on India’s rupee internationalisation plan.

Find this comment offensive?

Choose your reason below and click on the Report button. This will alert our moderators to take action

Reason for reporting:

Your Reason has been Reported to the admin.

To post this comment you must

Log In/Connect with:

Fill in your details:

Will be displayed

Will not be displayed

Share this Comment:

Uh-oh this is an exclusive story available for selected readers only..

Worry not. You’re just a step away.

Prime Account Detected!

It seems like you're already an ETPrime member with

Login using your ET Prime credentials to enjoy all member benefits

Log out of your current logged-in account and log in again using your ET Prime credentials to enjoy all member benefits.

To read full story, subscribe to ET Prime

₹34 per week

Billed annually at ₹2499 ₹1749

Super Saver Sale - Flat 30% Off

On ET Prime Membership

Unlock this story and enjoy all members-only benefits.

Offer Exclusively For You

Save up to Rs. 700/-

ON ET PRIME MEMBERSHIP

Get 1 Year Free

With 1 and 2-Year ET prime membership

Get Flat 40% Off

Then ₹ 1749 for 1 year

ET Prime at ₹ 49 for 1 month

Stay Ahead in the New Financial Year

Get flat 20% off on ETPrime

90 Days Prime access worth Rs999 unlocked for you

Exclusive Economic Times Stories, Editorials & Expert opinion across 20+ sectors

Stock analysis. Market Research. Industry Trends on 4000+ Stocks

​Get 1 Year Complimentary Subscription of TOI+ worth Rs.799/-​

Stories you might be interested in

• Search Search Please fill out this field.
• Options and Derivatives
• Strategy & Education

Assignment: Definition in Finance, How It Works, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

• The transfer of an individual's rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
• In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.

Key Takeaways

• Assignment is a transfer of rights or property from one party to another.
• Options assignments occur when option buyers exercise their rights to a position in a security.
• Other examples of assignments can be found in wages, mortgages, and leases.

Uses For Assignments

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, or other asset of value. to another entity through a written agreement.

Assignment rights happen every day in many different situations. A payee, like a utility or a merchant, assigns the right to collect payment from a written check to a bank. A merchant can assign the funds from a line of credit to a manufacturing third party that makes a product that the merchant will eventually sell. A trademark owner can transfer, sell, or give another person interest in the trademark or logo. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of the object.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker's paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy . Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

Biden's latest student-loan forgiveness plan brings questions for borrowers: What to know

Some student loan borrowers may not take advantage of President Joe Biden's final plan to eliminate debt for millions because they don't know if they're eligible, don't understand the process or think it is a scam.

On Monday, Biden promised student loan relief by the fall with his final proposal. This plan comes less than a year after the Supreme Court blocked his initial attempt.

Under the proposed plan, more than 4 million borrowers who have been paying down their student loans for 20 years or more could have their debt completely canceled, according to the White House. The plan would also help more than 10 million borrowers by giving them $5,000 or more in relief, Biden's administration said.

Biden also aims to help 23 million borrowers by eliminating interest past the original loan amounts.

How to apply for student loan forgiveness?

If eligible for debt relief, borrowers should periodically check their emails for updates from their student loan servicers and Federal Student Aid .

Learn more: Best personal loans

While Biden works on his final proposal, eligible borrowers can apply on the Federal Student Aid website for other kinds of relief, including if they have a disability , work for a nonprofit , or are a teacher , government employee or medical professional .

Borrowers repaying their loans for 20 to 25 years can apply for income-driven repayment (IDR) loan forgiveness.

Several other loan forgiveness options are available on the Federal Student Aid website, but borrowers should check if they're eligible by looking closely at each selection. Victims of forgery, borrowers who declared bankruptcy and Perkins loan borrowers are examples of individuals eligible for forgiveness.

What document explains your rights and responsibilities as a federal student loan borrower?

A Master Promissory Note (MPN) is a binding legal document borrowers must sign before they receive a federal student loan promising they'll repay the loans and any accrued interest and fees to the U.S. Department of Education, according to Federal Student Aid.

Student loan debt: Averages and other statistics in 2024

There is one MPN for direct subsidized/unsubsidized loans and a different MPN for direct PLUS loans. All MPNs can be signed electronically.

"You may receive more than one loan under an MPN over a period of up to 10 years to pay for your or your child’s educational costs, as long as the school is authorized to use the MPN in this way and chooses to do so," the Federal Student Aid website says.

Am I eligible for student loan relief?

By checking their emails, borrowers typically receive messages explaining whether they're eligible for relief and what type they can apply for.

If not signed up for emails, borrowers can visit the Federal Student Aid website and check their eligibility by hovering over the "loan forgiveness" tab and clicking "types of loan forgiveness."

Once the borrower clicks "types of loan forgiveness," they will be taken to a page showing the available relief options. Borrowers then can check their eligibility.

Be aware of student loan scams

Federal Student Aid warns borrowers to be aware of scams because they "might be contacted by a company saying they will help you get loan discharge, forgiveness, cancellation, or debt relief for a fee."

"You never have to pay for help with your federal student aid," the office's website says. "Make sure you work only with the U.S. Department of Education, the office of Federal Student Aid, and our loan servicers, and never reveal your personal information or account password to anyone."

The emails to borrowers come from [email protected], [email protected] and [email protected].

Borrowers can report scam attempts to the Federal Trade Commission by calling 1-877-382-4357 or by visiting reportfraud.ftc.gov.

Student loan scam involving 'Mission Hills Federal'

The Federal Trade Commission announced March 13 that it is sending more than $4.1 million in refunds to 27,584 borrowers who "lost money to student loan debt relief scammers who lured consumers with fake loan forgiveness claims and pocketed their money," according to a news release.

The scheme, which "tricked students into paying hundreds to thousands of dollars" since 2014, went by many names including Mission Hills Federal, Federal Direct Group, National Secure Processing and The Student Loan Group.

The group made the borrowers pay "illegal upfront fees and pretended to lower consumers’ monthly student loan payments," according to the FTC. The operators also deceived borrowers into sending their monthly student loan payments directly to them by "falsely claiming to take over the servicing of the consumers’ loans," the agency said.

"In reality, few payments were actually applied to consumers’ student loans and in many cases, none at all," the FTC said. "Instead, the defendants kept consumers’ money for themselves."

The Federal Register

The daily journal of the united states government, request access.

Due to aggressive automated scraping of FederalRegister.gov and eCFR.gov, programmatic access to these sites is limited to access to our extensive developer APIs.

If you are human user receiving this message, we can add your IP address to a set of IPs that can access FederalRegister.gov & eCFR.gov; complete the CAPTCHA (bot test) below and click "Request Access". This process will be necessary for each IP address you wish to access the site from, requests are valid for approximately one quarter (three months) after which the process may need to be repeated.

An official website of the United States government.

If you want to request a wider IP range, first request access for your current IP, and then use the "Site Feedback" button found in the lower left-hand side to make the request.

Year of Direct Assignments: Volumes surge as NBFCs loan-sell as the way

By Vineet Ojha ( [email protected] )

Financial year ending 2019 saw a sharp surge and a life time high in the volume of securitisation/ direct assignment transactions in the economy. Consequent to the funding problems that the NBFC and HFCs have been facing over the last few months, direct assignment of retail portfolios have picked up considerable pace, with volumes touching an all-time high of Rs 1.44 lakh crore during the nine-month period (April-December) of FY2019. Of this, around Rs 73,000 crore was raised by NBFCs and HFCs through sell-down of their retail and SME loan portfolio to various investors (primarily banks). Investor appetite, particularly from public sector banks and private banks, is high at present, considering investors are not exposed to entity level credit risk, and are seen taking exposure to the underlying pool of retail and SME borrowers. Yields have gone up significantly with the changing market dynamics. The momentum in the securitisation market is likely to remain strong in the current fiscal as it is emerging as an important tool for retail focussed NBFCs for raising funds at reasonable costs while simultaneously providing a hedge against Asset-Liability mismatches. A visual trend of the market over the years can be seen below:

Why the sudden surge?

Looking at the figure above, we can see a sharp surge in the DA volumes in FY19. Majority of the issuance comes from Q3 in the year with around Rs. 73,000 crores. Although the major driver is the IL&FS imbroglio, it is not the only reason for this development.

IL&FS crisis:

Following the IL&FS crisis, the RBI has time and again prompted banks to assist NBFCs to recover from the cash crunch. However, wary of the credit quality of the NBFCs/ HFCs, the banks have shown more interest on the underlying loan portfolios than on the originator itself. Through direct assignment and securitization, these institutions get upfront cash payments against selling their loan assets. This helps these institutions during the cash crunch. Funds raised by NBFCs and HFCs through this route helped the financiers meet sizeable repayment obligations of the sector in an otherwise difficult market

RBI relaxes MHP norms for long tenure loans:

Another reason that explains this sudden surge in the volume of direct assignment or securitization volumes was the relaxation of the minimum holding period (MHP) criteria for long-tenure loans by the RBI. This increased the quantum of assets eligible for securitisation in the system. The motivation was the same, to encourage NBFCs and HFCs to securitise their assets to meet their liquidity requirements. You can read more about the same in our article here.

Effects of Securitisation

Primarily, PLS requirements were the primary drivers for securtisation. The number of financial institutions participating in securitization were quite low. Now, for liquidity concerns, NBFCs and HFCs were forced to rely on securitization to meet their liquidity needs. This, not only made them explore a new mode of funding, but also solved other problems like asset liability mismatches. In the nine months of FY19 and FY18, the share of non- PSL transactions has increased to 35 per cent compared to 24 per cent in FY17 and less than 20 per cent in the periods prior to that.

However, it’s not a rosy picture allover. Due to the implementation of IFRS, upon derecognized of a loan portfolio from the financial statements of the company, the seller shall have to recognize a gain on sale on the transaction. These gains disturb the stability of the profit trend in these financial institutions which would result in volatile earnings in their statements. The NBFCs have been trying to figure out solutions which would allow them to spread the gain on transfer over the life of the assets instead of booking it upfront.

The securitisation market remained buoyant in the third quarter driven by the prevailing liquidity crisis, following defaults by IL&FS and its subsidiaries. This surge is good for the Indian securitization market as India’s contribution to global securitization market, at about USD 12 billion, is barely recognized, for 2 reasons – one, India’s market has so far been largely irrelevant for the global investors, and secondly, bulk of the market has still been driven by priority sector lending (PSL) requirements. PSL-based securitisations obviously take place at rates which do not make independent economic sense. Now due to the surge in non-PSL based securitization, the rates at which the portfolios are sold are attractive to investors. This could attract global investors to the market.

Now that financial institutions have gained exposure to the securitization markets, they find that the transactions are attractive for sellers as well as investors. Our interaction with leading NBFCs reveals that there are immediate liquidity concerns . Banks are not willing to take on-balance sheet exposure on NBFCs; rather they are willing to take exposure on pools. Capital relief and portfolio liquidity are additional motivations for the originiators (and other potential investors) to enter into securitization transactions.

Leave a Reply

Leave a reply cancel reply.

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Subscribe to receive regular updates!

An official website of the United States government

Here’s how you know

The .gov means it’s official. Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you’re on a federal government site.

The site is secure. The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely.

• Report Fraud
• Read Consumer Alerts
• Get Consumer Alerts
• Visit ftc.gov

View all Consumer Alerts

Credit, Loans, and Debt

Learn about getting and using credit, borrowing money, and managing debt.

View Credit, Loans, and Debt

Jobs and Making Money

What to know when you're looking for a job or more education, or considering a money-making opportunity or investment.

View Jobs and Making Money

Unwanted Calls, Emails, and Texts

What to do about unwanted calls, emails, and text messages that can be annoying, might be illegal, and are probably scams.

View Unwanted Calls, Emails, and Texts

Identity Theft and Online Security

How to protect your personal information and privacy, stay safe online, and help your kids do the same.

View Identity Theft and Online Security

• Search Show/hide Search menu items Items per page 20 50 100 Filters Fulltext search

If someone you care about paid a scammer, here’s how to help

Sharing a scam experience with someone you know takes courage. If someone trusts you enough to share their scam story, especially if the scammer is still in touch with them, here’s some advice to help guide you.

• Lead with empathy.  Respond with kindness and concern instead of criticizing or expressing disappointment. Scams can happen to anyone. Keep lines of communication open with a kind, concerned response. 
• Let them tell their story. Talking about a scam experience helps you both understand what happened. And talking about the scam also helps both of you spot it in the future.
• Validate their story. The only person at fault here is the scammer — not your friend or family member. It’s a scammer’s job to steal money or information, and they’ll target anyone. Ask them not to blame themselves and, instead, blame the scammer.
• Ask what we can do next together. See if their personal information was involved, too, so identity theft might be a concern. And see if they might want to report the scam. Their story can help protect friends, family, their community, and themselves, as well as helping law enforcement agencies like the FTC fight that scam. 

Want more help for your friend or family member? Here are some resources:

• To report a scam, go to  ReportFraud.ftc.gov .
• Find out more about other  next steps to take after paying a scammer.
• And, if identity theft is a concern, help them start their recovery at  IdentityTheft.gov .

If scammers find the right buttons to push at the wrong time — like when we’re distracted or stressed — any of us might just pay them or share information. Thank you for helping someone through a difficult time. 

Add new comment

Read our privacy act statement.

It is your choice whether to submit a comment. If you do, you must create a user name, or we will not post your comment. The Federal Trade Commission Act authorizes this information collection for purposes of managing online comments. Comments and user names are part of the Federal Trade Commission’s (FTC) public records system, and user names also are part of the FTC’s  computer user records  system. We may routinely use these records as described in the FTC’s  Privacy Act system notices . For more information on how the FTC handles information that we collect, please read our privacy policy .

Read Our Comment Policy

The purpose of this blog and its comments section is to inform readers about Federal Trade Commission activity, and share information to help them avoid, report, and recover from fraud, scams, and bad business practices. Your thoughts, ideas, and concerns are welcome, and we encourage comments. But keep in mind, this is a moderated blog. We review all comments before they are posted, and we won’t post comments that don’t comply with our commenting policy. We expect commenters to treat each other and the blog writers with respect.

• We won’t post off-topic comments, repeated identical comments, or comments that include sales pitches or promotions.
• We won’t post comments that include vulgar messages, personal attacks by name, or offensive terms that target specific people or groups.
• We won’t post threats, defamatory statements, or suggestions or encouragement of illegal activity.
• We won’t post comments that include personal information, like Social Security numbers, account numbers, home addresses, and email addresses. To file a detailed report about a scam, go to ReportFraud.ftc.gov.

We don't edit comments to remove objectionable content, so please ensure that your comment contains none of the above. The comments posted on this blog become part of the public domain. To protect your privacy and the privacy of other people, please do not include personal information. Opinions in comments that appear in this blog belong to the individuals who expressed them. They do not belong to or represent views of the Federal Trade Commission.

thank you for sending mr this information.

Great Advice!!

thank you for sending me this information.

In reply to thank you for sending me… by Jeanette Banister

I used to report for you,I didn't see your good integrity with the victim me to catch the scammer and to stop my loss,the reason of reporting for you ,it didn't make me sense based on my experience. I hate scammer when relax like cool, they look like corrupted with the power... Sad experience.. Told the truth is not aggressive, it is authenticity😎.

My mom was scammed by a scammer in Nigeria and I reported it to Western Union as they said I could recoup some of the money because they had a class action suit. I spent 2-3 day gathering all the information and sent it to them, never heard a word back from them. She had sent about $60 - $70,000. File all the information they asked for. After all that work gathering all the information it makes me wonder was I the one getting scammed by W.U. This happened back in 2020-2021. Never heard a word back from them.

In reply to My mom was scammed by a… by Mark Yeag.

I was scammed years ago through Western Union, it was hard but I was able to provide eastern Union with all the transaction information, now several years to later, then just sent me a message that they needed the in information again, well I already gave it to them and they have it or how and why would they even contact if they didn't have it, miss, you are absolutely correct when you suggested that western Union was involved, it's not right, it's not fair business practices, I also believe the entire deal is connected to Western Union and I want my money back too, but with the deceite if western union employees we might never get my money back blessings!!!!!!?

What is absolutely unforgivable is all these government agencies do nothing to help out the victim. Yes fact finding and data collecting is important for policy making but the person who got scammed really gets no direct help whatsoever .

Thank you I did contact FTC I was scammed out of 22,500.00 to Homematters USA CASE IS PENDING BUT YOU NEVER TELL US HOW TO RETRIEVE OUR MONEY BACK; in other words FTC DO INVESTIGATE, but often we the victims never are compensated

In reply to Thank you I did contact FTC … by Deborah C Johnson

If the FTC files an enforcement matter related to something you reported, and gets money back for people, we will try to contact the people who filed reports, and other people who lost money. Read the Frequently Asked Questions to learn about what happens after you report something to the FTC at https://reportfraud.ftc.gov/#/faq .

We also explain the steps involved in getting refunds to people. Go to this page to read those steps: https://www.ftc.gov/enforcement/recent-ftc-cases-resulting-refunds/how-… .

The FTC has a public list of active refund programs at www.ftc.gov/enforcement/refunds . The list tells you who to contact if you have a question about a refund in something on the list.

In reply to If the FTC files an… by FTC Staff

The active refund programs URL should be https://www.ftc.gov/enforcement/refunds

I was scammed last year, but I had friends who were able to help me undo the damages!

I didn't get back the stolen money, but I was lucky enough to have it replaced in my investment portfolio, while my monthly allowances replenished my checking and savings accounts!

I was cornered by my family and accused of lying and deceit. It was a horrible shaming experience and continues to bring me to tears. They will never know my full story because they didn't want to "listen" to me. I've been in some type of pain ever since. Thank you for sharing this vital, kind approach to helping others who might feel trapped in their scammer's web.

In reply to I was cornered by my family… by Taci

I have to agree that it’s emotionally and mentally the worst pain to go through and some people have taken their life because of all these scammers and everything they have done to cause so much pain and even death and I don’t want anyone to go through it was like I didn’t have any control over myself and I couldn’t believe the things I normaly would never said,did or done or whatever it was as I was brainwashed and had no control but I help others to know and bring awareness about this now

We've been scammed, and it is a nightmare to get it resolved. These crooks are getting wiser by the minute, we all need to be aware of their tactics. Thank you for putting this info out here ... keep it up!

why isn't the federal government doing more to stop these international scammers from preying on Americans? Can't these phone calls from around the world be stopped? Our tax money is going into this website telling people to be kind--but nothing is being done to end this horror!

I am educated more on identity theft, and various scammers!

My husband was scammed a few years ago out of 1000$ off an Apple card the scammer sent a text & when my hubby called a # given to him the man on the phone told him to enter 99999 as a code, well next thing you know the 1000 was gone! We were devastated because we are not rich & had recently recieved that money & needed it badly for bills.We tried all kind if things, then I came across this website. My hubby sent FTC a message explaining what happened & the on line bank that was holding the $ told us they couldn't return it to us because....I dont remember, but we did get the $ back on the Apple card then moved it to our checking account! We couldn't believe it, it had been 1 year!!! So, don't give up!! Someone @the FTC is listening & I am so thankful. Whoever you are God Bless You!!!

I was actually a victim and I was scammed for around 2k. Trying to get extra money for my daughter and bills. To anyone reading this do not try anything that sounds to good. I tried the bitcoin flip and all they do is tell you you have to pay more and more for the transaction fees.

This is very important info for people to know. I will share with others. Thank you.

Thank you for this information, I am evidently a victim of both scamming, jamming and identity theft, it turns out, it is more difficult and costly to reclaim my identity, than anything else I have undertaken. It's frightening, however I was not previously aware that the FTC is a law enforcement agency, that is a good thing.

The only way to stop them would be a world alliance with big exemples. Unfortunately, some governments encourage them.

Introduction

What is a payday loan, what is a personal loan, comparing payday and personal loans, advantages and disadvantages, other financing alternatives, payday loans vs. personal loans: what you need to know.

Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate personal loans to write unbiased product reviews.

• Payday loans usually come with very high interest rates, and are often based on your income.
• Personal loans are long-term installment loans that usually have lower rates than payday loans.
• Payday loans are always a worse option than personal loans because of their high rates.

Taking out a loan can be a helpful way to afford costs you may not otherwise be able to cover at the moment. You may want to borrow to cover medical expenses, home improvements, or possibly even a vacation.

The most common forms of loans for quick cash are payday loans and personal loans , though one is a far better option than the other. 

Overview of payday and personal loans

A payday loan is a high-cost, short-term unsecured loan that has a principal that is a portion of your next paycheck. A personal loan is a long-term unsecured loan with higher minimum loan amounts and lower interest rates. You can use the money from either pretty much however you want to; aside from that, they have few similarities. 

Stefanie O'Connell Rodriguez, the host of Real Simple's Money Confidential podcast and a personal finance expert with Discover, recommends steering clear of payday loans if at all possible. 

"It's an option of last resort, like truly avoid it at all costs," O'Connell Rodriguez says. "If you're weighing something like, 'OK, do I use a payday loan or a credit card or a personal loan,' understanding that the payday loan is the option of last resort might help make that decision a little bit easier."

Definition and key features

Payday loans are often for small amounts of money, commonly $500 or less. They are designed for borrowers who are in a pinch — maybe you need cash to cover an unexpected medical bill or a damaged item. Payday loans provide immediate funds, come with extremely high interest rates, and are usually based on your income, not your credit history.

Interest rates and fees

"Payday loans come at a price," says Kendall Clayborne, a certified financial planner at SoFi . "They may have interest rates of more than 600%. Such high-interest rates, not to mention other associated fees, can quickly lead to situations where you end up getting behind on the loan and have to borrow more and more in order to pay it back."

Payday loans are never a better option than personal loans. They come with extremely high interest rates and are often predatory in nature. 

Repayment terms

You can get a payday loan by walking into a brick and mortar lender or via an online lender. When you take out a payday loan, you'll often agree to give the lender permission to withdraw funds from your bank after your check has been deposited. The lender might ask for a signed check so they get the funds shortly after your next paycheck.

With a personal loan, you apply to take out a specific amount of money. The lender will show you available offers depending on financial factors such as your credit score, debt-to-income ratio, and ability to repay the loan. You can use a personal loan for a variety of reasons, including home improvement, medical bills, and vacation. 

"Personal loans come with a credit check to qualify, but will give you a longer term to pay them back," Clayborne says. "Your repayment timeline may be less stressful — giving you flexibility to pay over the course of a few years rather than a few months. With a longer payment term, your personal loan may be more manageable than a payday loan."

Personal loans are always a better option than payday loans, as they come with lower interest rates and the lending decision is based on your ability to repay. Most personal loans have fixed interest rates that stay the same over the life of the loan. 

Online lenders, banks, and credit unions will give you money that you repay over a fixed period, say one year or five years. Personal loans are almost always unsecured, which means they don't require collateral — like a house or a car in the case of a mortgage or auto loan — to receive. 

See our picks for the best personal loans »

Pros and cons of payday loans

Pros and cons of personal loans .

• Borrow from friends and family. While it may be uncomfortable asking your loved ones for money, you might get better terms when you borrow from people close to you. The repayment term length may be more lax and you might not even be charged interest.
• Apply for a credit card. Credit cards offer revolving lines of credit, which means you can borrow up to a limit, and when you pay it back, you can borrow up to that amount again. It could be a better choice if you don't need a lump sum. Some credit cards may even offer a zero-interest introductory rate.
• Work more hours or take on another job. This could require a significant lifestyle change. It could increase your childcare costs, drive up your emotional stress levels, and leave less time to enjoy life. That said, increasing your cash flow reduces the need to borrow, making it an attractive, although difficult, option if you prefer to avoid debt.

Payday loans can affect your credit score if the loan goes to collections and is reported to credit bureaus. However, lenders typically do not report on-time repayments to the credit bureaus.

Personal loans are better for larger expenses. They offer larger loan amounts, longer repayment terms, and lower interest rates compared to payday loans, making them more suitable for significant financial needs.

Payday loans are often available almost immediately, sometimes within 24 hours of application. Personal loans may take longer to process, typically a few days to a week.

Personal loans usually require a credit check and factor in your credit score, income, and debt-to-income ratio for approval. Payday loans have fewer requirements, usually proof of income and a bank account, but come with higher interest rates and fees.

You can use a personal loan to pay off a payday loan. This can consolidate high-interest payday loan debt into a single, lower-interest personal loan, potentially saving money on interest.

• Main content