For instance, while MFs can invest only in “instruments”, banks often prefer to acquire loan portfolios outright, as PTCs—by virtue of being investments— would need to be marked to market, and loans and advances do not have such requirement. Further, for the purchasing banks, the attraction is that many of such loans qualify for the Priority Sector Lending (PSL) requirements. 13.
From a regulatory perspective, the real issue is that of regulatory arbitrage. While there is nothing wrong in direct sale of loans, banks should appreciate that if these transactions are being done to avoid restrictions on profit booking and higher capital requirements for credit enhancements, RBI would have concerns.