Introduction: The Reserve Bank of India (RBI) has recently issued a crucial directive, numbered RBI/2023-24/99, dated December 28, 2023, impacting Scheduled Commercial Banks, All-India Financial Institutions, and Non-Banking Financial Companies. The directive revolves around the Minimum Holding Period (MHP) exemption for the transfer of receivables, specifically in the context of factoring business.
Detailed Analysis:
1. Background and Regulatory Context: The directive refers to clause 39 of the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (MD-TLE), which outlines the MHP requirements for the transfer of loans.
2. Objective of the Directive: The primary objective is to stimulate secondary market operations related to receivables acquired in the factoring business, as defined by the Factoring Regulation Act, 2011.
3. Conditions for MHP Exemption: To qualify for the MHP exemption, eligible transferors must meet the following conditions:
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- The residual maturity of transferred receivables should not exceed 90 days.
- The transferee must conduct a thorough credit appraisal of the drawee of the bill, adhering to specified clauses in the MD-TLE.
4. Amendments to MD-TLE: The directive incorporates a significant amendment to clause 39 of MD-TLE, introducing a proviso that exempts certain receivables in the factoring business from the MHP requirement.
Conclusion: In conclusion, the RBI’s decision to exempt the Minimum Holding Period for the transfer of receivables in factoring business is a strategic move to encourage the growth of the secondary market. This move is expected to provide a boost to financial institutions engaging in factoring activities, fostering liquidity and efficiency in the market. As outlined by Chief General Manager Vaibhav Chaturvedi, while this exemption offers new opportunities, it is crucial for entities to remain compliant with other provisions of the MD-TLE. The impact of this directive on the financial landscape will unfold in the coming months, shaping the dynamics of receivables management in India.
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Reserve Bank of India
RBI/2023-24/99
DOR.STR.REC.60/21.04.048/2023-24
December 28, 2023
All Scheduled Commercial Banks (excluding Regional Rural Banks)
All All-India Financial Institutions
All Non-Banking Financial Companies (including Housing Finance Companies)
MHP Exemption for Transfer of Receivables
Please refer to clause 39, of the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (“MD-TLE”), regarding requirement of Minimum Holding Period (MHP) on transfer of loans.
2. In order to develop secondary market operations of receivables acquired as part of ‘factoring business’ as defined under the Factoring Regulation Act, 2011, it has been decided that transfer of such receivables by eligible transferors will be exempted from MHP requirement, subject to fulfilment of the following conditions:
i. The residual maturity of such receivables, at the time of transfer, should not be more than 90 days, and
ii. As specified under clauses 10 and 35 of these directions, the transferee conducts proper credit appraisal of the drawee of the bill, before acquiring such receivables.
3. Accordingly, a suitable proviso has been added to clause 39 of MD-TLE, through amendment dated December 28, 2023.
4. All other provisions of the MD-TLE shall continue to be applicable, as hitherto.
Yours faithfully,
(Vaibhav Chaturvedi)
Chief General Manager
