A loan assignment (read: loan with participation) is defined as an operation whereby a assignor transfers all or part of its economic interest in a loan to one or more assignees, without transferring the loan contract. And the assignee must finance the assignor to the extent of the economic interest transferred, amounting to principal, interest, charges and other payments, if any, in accordance with the agreement.
A minimum holding period (MHP) of 3 to 6 months, depending on the duration of the loan, is prescribed for the transferor. The assignee (s) may obtain a credit rating from loan pools, but this rating is not a substitute for due diligence on the part of the loan pools. Thus, the standards require skin in the game, which seems flawless. Disclosure is mandatory on the valuation of the loan and the discount rate used by the transferor, which may be related to cost of equity, average cost of funds, or opportunity cost or other criteria, the contractual interest rate charged being the floor. For loan transfers of 100 crore or more, two external appraisal reports are required.
Both performing and non-performing assets can be transferred, but the rules state that stressed loans can only be transferred to authorized transferees and asset rebuilding companies through a tendering process known as the Swiss Challenge Method. – the initial bid is made public, others bid against it and the original bidder has a better chance of these bids.