A comparison and evaluation of the different methods


The International Banking system is the system of lending and obtaining of funds for banks and their customers. Banks lend money to customers by using three basic techniques which are the overdraft, the term loan and the syndicated loan. The term loan is a simple loan for a fixed period of time. Banks may well wish to transfer loans to diversify the risk and build up investment portfolios. This paper evaluates firstly an account of the various reasons for the making of a transfer of a term loan and secondly the three principal methods (i.e. (1) assignment, (2) novation and (3) participation) of transfer including the techniques and legal issues involved and the results obtained. This paper shall examine the suitability of each method in different situations and conclude as to what are the factors that should be considered before making a choice of a particular technique used to make such a transfer.


Transfer of term loans can take place for a variety of reasons and there are several means of transfers with different needs and consequences and these must be vigilantly examined and judged while selecting the particular technique to use in any particular circumstances.

The three basic techniques by which bank lend money to their customers are overdraft, the term loan and the syndicated loan. The most basic technique amongst these three is the term loan lending technique. A term loan in simple words can be described as a loan given for a fixed period of time. Any bank who lends money to a borrower mitigate the credit risk and other risks involved in such a lending. [1] Since a term loan being fixed for a term and can only be reclaimed by the lender after the expiration of the term period unless there is a default in payment by the borrower, therefore a bank may wish to transfer such a loan to diversify the risk and build up investment portfolios. [2] The process affecting such a transfer is known as asset sales. Asset sale in simple words means the process of disposing off a loan asset from the balance sheet of a bank by selling it to another bank. There could be various reasons as to why a bank may wish to sell/transfer a term loan such as increase in taxation or regulation, political and jurisdiction reasons, to diversify the risk, in an event of default etc. [3] The first Chapter of this Research Paper will aim at evaluating the various reasons of transfers of loans. It is very important to understand as to why a bank may wish to transfer a loan so as to understand the mechanism of transferring a loan. Chapter 2 of this Research paper will then briefly discuss the various available techniques of transferring a loan and what are the three main techniques available to facilitate such a transfer. Once all the available techniques are very briefly discussed and it is clarified that there are 3 main techniques of transferring a loan i.e. assignment, novation and participation the next Chapter will focus on the first technique i.e. assignment. It shall be discussed in this chapter that the technique of assignment can only be used to transfer benefits and rights and not obligations. This chapter also aims at dealing with the legal issues and the results obtained by using this technique. Chapters 4 and 5 deals with the next two techniques ie novation and participation respectively in a similar manner. Novation is a technique which can be used to transfer both rights as well as obligations. It is done by replacing the old loan agreement with a new one on similar terms and conditions. Participation on the other hand is a technique by which new banks participate with the old bank by sharing an amount with the existing bank. Here the new bank has no right to claim any amount from the borrower directly and is paid by the existing bank on pro-rata basis as an when a payment is received from the borrower. [4] Chapter 6 then compares and evaluates the suitability of each method in different situations. Assignment and novation gives the buying bank a beneficiary interest in the debt which cannot be achieved through participation. On the other hand participation keeps the banker customer relationship intact which the other two techniques do not. Each technique is different from the others and used in different situations depending upon the need and requirement of the circumstances. [5] Thus, it can be said that selection of a mechanism to transfer a loan depends upon the circumstances surrounding the particular proposed transfer. In my view it also depends upon whether a bank wishes to buy or sell a loan. In my view a seller bank would prefer to part with the loan through participation as it keeps the original relationship with the borrower intact and diversifies the risk. On the other hand a buyer bank may not be keen on making such a transfer due to the fact that it gives the participating bank no right in the debt and it faces a double credit risk. However if along with the rights the situation demands that the obligations shall also be transferred then there is no other available option but to use the technique of novation.

Chapter 1:

Reasons for Transfer of Term Loans

W. Silber has marked in his theory of financial innovation’s constraints that the innovation of a financial product is an organization’s (banks or enterprises) response to the unpleasant restraining factors. A term loan may be transferred for reasons such as laws, risks, and competitions. It may be called as a method of assets management modernization which appeared in the reorganization and improvement of the financial industry. [6] 

A bank may wish to transfer a loan given to a borrower for numerous and varied reasons.

Firstly, a bank may see an opportunity to obtain very high profits in an investment which has newly come up in the market and is tempted to make an investment. However due to the constrains of lack of immediate funds it may wish to sell the loan in order to invest the amount to maximise its profit. The banker may analyse the risk and conclude that it is no longer profitable to hold on to a loan as a new project in the market may give it much better returns than the loan. [7] 

Secondly, each bank has to pay regulatory taxes in the form of federal deposit insurance premiums. Banks have to pay a fixed amount of premium calculated on the basis of their total domestic deposit to the Federal deposits insurance corporation (FDIC) for the deposit of their insurance. A portion of their deposits is also to be held with the FDIC as interest free reserve and another amount as deposit against their assets. Thus banks sell loans to increase their capital as larger capital requirement will result in outsized tax regulation. Lack of capital adequacy results in the bank coming under scrutiny and being imposed with additional tax. [8] (Why commercial Banks sell Loans-An empirical analysis, Christine Pavel and David Phillis)

Thirdly, a bank may wish to sell a loan in order to diversify and fulfil its requirement for funds. A bank may face a situation where it needs liquid assets immediately in order to make a payment to a depositor of the bank. As we know that bank uses funds of their customers for the purpose of investments and providing loans. If a situation arises where it had to make a payment to a depositor such an amount which the bank cannot immediately pay due to the investments made and money lent. It may be compelled to sell of a loan and make such payment. Thus we can say that banks see loans as an alternate source of funding a bankmay sell loans in order to meet the short term liability. [9] (Journal of International Banking Law 1992 Removing loans from banks' balance sheets - an overview of the techniques, the markets and the regulatory issues by. Sylvie Dewulf-Verstraeten).

Moreover in the case of default, the banker may lose faith in the borrower and fear that the borrower might not be able to pay the loan back. In such a situation a bank may be inclined to sell a loan to a bank which holds a deposit account of that borrower which shall make it easier for the new banker to recover the amount from such borrower. (Developing a secondary market in loan assets, Michael Bray) (Law and Practice of International Finance, University edition, pg 145, Phillip Wood)

A bank may also be required to sell a loan due to political reasons which result in jurisdiction issues. It may be possible that due to political changes a borrower may now fall into a different jurisdiction and the lender may find it feasible to transfer such loan to a jurisdiction within that of the borrower. It also makes it convenient in case of initiating legal proceedings in a situation of insolvency or default in payment. Also when the borrower has assets in a different jurisdiction, it may be desired by the lender to transfer the loan to to a lender in that jurisdiction for the purpose on claims. The banks may also sell loans for the purpose of securitization i.e. to convert its financial assets into marketable securities in order to increase liquidity. [10] Other reasons as such as getting rid of distressed loans and to restructure the banking group are a few more reasons as to why a bank may transfer loans. [11] 

Chapter 2:

Various forms of loan transfers:

In order to transfer a loan to another bank, the lender has to be aware of the options available to facilitate such a transfer. A loan may be transferred from one bank to another in various forms. The first and foremost form of transferring a loan is assignment which may be legal or equitable. A legal assignment is one which transfers all the rights of the lender. For a legal assignment, provides that the assignment must be in respect of the whole of the debt and not a part of it, it has to be in written form and signed by the lender and notified to the borrower. [12] If any of the requirements of Section 136 is found to be missing in the assignment such as the lender assigns a part of the debt and not the whole of it to the buying bank or if the borrower is not notified about the assignment by the seller, then it is more likely to be an equitable assignment. [13] 

Novation is another method by which a loan can be transferred. It is the only way a lender can transfer the rights in the loan along with the obligations. In this process the old loan agreement is replaced by a new one on similar terms after getting the consent of all the parties. [14] 

The other form of participation is funded participation which creates new contractual rights in favour of the participating bank against the existing bank. In a funded participation the participant bank has no right or claim against the borrower as it is a result of a separate agreement between the seller and the buyer. When the participant merely shares the risk and does not deposit any sum with the seller and merely shares the risk of the seller in the loan amount generally for a fees is known as risk participation. [15] 

Each of the above technique is distinct and may be used in different situations to obtain different results. However, the most commonly used technique to transfer loans are equitable-assignment/assignment, novation and funded-participation/sub-participation/participation.

Chapter 3


The mechanism of transferring loan benefits in the English legal system is known as the assignment in equity. [16] The loan agreement generally contains the provisions relating to the assignment of the rights of the parties. However in common law countries such assignment is generally possible if the position of the borrower does not get affected prejudicially. [17] 

In an austere legal sense only an assignment can be assumed to effect sale of an asset. However it is a general practice to refer the lead bank and the participant as seller and buyer in no matter what technique of transfer being used. Assignment means the transfer of the escort bank rights to whole or part of its interest in the loan to the participant. If the proprietary interest in the loan given to the participant meets the requirements of section 136 of the Law of property Act 1925 it will be a legal assignment otherwise it an equitable assignment. [sec. 136(1) requires that the assignment must be i. Absolute i.e. the assigners entire interest in the debt must be assigned ii. In writing under the hand of the assignor and iii. Written notice of the assignment must be given to the debtor]. Assignment can be called as an exception to loan participation as participation usually means the transfer of only a part of the loan to only one participant but on the other hand assignment does not necessarily fulfil such requirement of statute as it functions in equity. [18] 

A lender might assign his rights to interest and principal payments under a loan agreement to a third party. However, a loan agreement may include a clause restricting assignment which could result in complexity in carrying any assignment. [19] An independent transfer by one party to a third party of its rights against a second party is the essence of assignment. Such assignment may be disclosed (when notified to the second party) or silent (when not notified to the second party). [20] An assignment does not replace an old debt with a new debt rather transfers one parties rights under the original debt to a third party. [21] By using the method of assignment a bank may only sell its rights and it is generally not possible to transfer its obligations (amalgamation of companies being an exception to the above rule). However, Vinod Kothari in his book has expressed his views on assignment as a technique to transfer rights or of obligations that under a contract. He has further argued that as per rule one party is not allowed to transfer his obligations to other party without the consent of all parties and this rule is applicable both at the common law and in equity. [22] Though I agree to the above point to an extent that obligations can only be transferred by one party to another with the consent of all parties. However, I differ on the view that it is known as an assignment. An assignment does not transfer any obligation and only transfers rights and benefits. Vinod Kothari has given reference to the Halbury’s Law of England to support his idea that assignment is used to transfer obligations by consent of parties. Though he has clarified in his arguments that such a transfer of obligation by way of assignment is actually novation. [23] However, after referring to the Annual Law Review and books of Phillip Woods, Ross Cranston, Joana Benjamin, Ellinger and other English Authors I am of the view that assignment is used only to transfer rights and not obligations and novation shall not be termed as an assignment of obligation as they are two different techniques used in different situations and give different results.

The English common law on assignment of receivables follows specific procedures. Anglo Saxon or English common law follows a specific pattern for such transfers for two basic reasons. Firstly, to avoid the confusion of title as possession being the prime evidence of movable property, it is very important to record such transfers to avoid any difficulty in proving the title. Thus Anglo-Saxon Law makes it is mandatory to register all such transfers which is the prime evidence of such a transfer though it is not exclusive or conclusive evidence of such a transfer. Secondly if such transfers are not recorded and the debtor is not made aware of such a transfer, the debtor would be prejudiced in a sense that he will have to honor claims from unknown parties to which such a transfer is made if at all such a situation occurs. Thus it can be said that the Anglo-Saxon Law treats such a transfer as it would treat a transfer of immovable property. [24] 

However under the Roman Dutch Law or the Civil Law properties were classified into two parts as properties requiring malcipation and properties not requiring malcipation. Malcipation means the the legal documentation of the transfer of property. The Roman – Dutch Law or the Civil law treats such transfers as not requiring legal documentation and hence differs from the English law completely.

If the agreement does not prohibit the assignment of a receivable all recievables may be assigned in accordance with the statute and public policy. Article 9 of the UN Convention deals with receivables owed by sovereign debtors however article 40 permits states to make a reservation to such effect in the contract. Sovereign means a country or the government. If a state has a statutory limitation on transfer by assignment then Article 40 of the UN convention prohibits such transfer. State entities are usually reluctant to such assignments as it may result in the State coming under an obligation to deal with a party which it would not wish to have any dealing due to its unfriendly relations with such state. [25] Thus the law of assignment in international banking treats sovereign borrowers different from private borrowers in order to maintain peace and harmony.

In my view assignment is a very important technique of transferring obligations by a bank to another, however a selling bank must take into consideration the factors such as surrendering its banker-customer relationship, parting with the rights over the loan, legal restrictions, costs etc. On the other hand a buyer is in a better position in terms of risk and other factors involved if the transfer takes place through assignment.

Chapter 4 Novation:

Novation is the mechanism which allows transfer of both rights and as well as obligations. Penn,Shea and Arora have described novation as an arrangement between the parties to the loan to surrender its old rights and obligations with new ones on similar terms and conditions. Thus novation provides an exclusively new contract between the existing bank the new bank and the borrower bank. The existing bank is then reimbursed out of the new loan by the new bank.

Novation can take take place in two ways. Firstly, by cancelling all the rights and obligations of the existing bank and substituting it by with exactly the same rights and obligations in respect of the new bank. Secondly, the existing bank allocates all its rights to the new bank and the new bank presume all the obligations as the borrower releases the existing bank from all its obligations. [26] 

Novation is consensual and multiparty agreement between the borrower, existing bank and the new bank where the borrower agrees to oblige the new bank with the debt and the existing bank obliges the new bank with its rights. Usually such a transfer takes place by way of a tripartite agreement between the transferor, transferee and the debtor. [27] Novation is considered legally to be the most apt way of transferring rights and obligations though it requires the consent of all the parties and is practically burdensome due to the documentation and costs. Thus it can be opined that novation is not exactly a method of transfer of receivable as it involves drafting a new agreement and cancelling the old one. [28] Such an agreement is binding upon all the parties.

Although novation is a consentual process, where the borrower permission is required to transfer the rights and obligations by the existing bank to a new bank, however it may be noted that as per the English law such consent may not be unjustly delayed or withheld. [29] 

However, the creditworthiness of the new bank plays an important role in effecting such a transfer as the non-creditworthiness of the new bank may be taken as a ground by the borrower in refusing its consent to such transfer. [30] 

It is in practice to include in the original loan agreement the borrowers agreement to novate in favour of any third party chosen by the lending bank. It is a trend now to have a novation certificate included in the original loan agreement which shall be signed by the borrower and agreed that a facility agent may carry out the novation on his behalf at the time of making it. [31] The seller and the buyer along with the facility agent signs the certificate at the time of novation. Although this practice may be viewed as an act against the concept that the consent of all the parties is required to novate. However, it can be justified as there being an implied consent by the borrower as he has signed the certificate with the knowledge that the loan may be novated. The English law recognises this practice as it sees it as an offer to novate made by the borrower to the world at large at the beginning of the loan agreement (Carlill vs Carbolic Smoke Ball Co.). [32] 

Under the English Law more transfers take place by way of novation than assignment. The main reason behind this is that the English Law does not allow obligations to be transferred by way of a contract. Therefore, in order to commit a further lending, novation seems to be the only method of effecting such loan transfer. [33] 

Thus, it can be said novation being the only method of transferring obligations is the only available option to the buyer and the seller if they desire to transfer the obligations along with the rights and benefits. In every loan there is a credit risk involved and novation can be said to be the cleanest technique in a sense that the seller does has nothing to do with the borrower or the loan after the novation has taken place and hence there is no possibility of a future credit risk from such transaction. Further the seller is not liable to advance any future loans etc to the borrower as the earlier loan agreement had come to an end and it had transferred all its obligations to the new bank by way of novation. On the other hand a buyer would also prefer this technique of transfer as it will give a direct right over the debt of the borrower which will secure the loan in a sense that he can take any legal recourse against the borrower in case of default. [34] 

Further this technique of transfer when appropriately drafted does not draw any U.K. Stamp duty or SDRT to be paid by the parties. The only drawback with this technique is that it might be sometimes become troublesome to receive consent from all parties, if not previously agreed in the original loan agreement.

Chapter 5


This is a method by which the new bank participates in the loan given to the borrower by the existing bank by depositing an amount with the existing bank. This amount may be called as the share of the new bank in the loan receivable by the new bank on pro-rata basis as and when the borrower makes the payment to the existing bank. Penn Shea and Arora perceive this technique as the most popular method of transferring loan in the English Legal System. The English Law allows such a transaction through a contract under which the new bank agrees to the existing bank that it shall only repay the amount as and when it is received from the borrower and if the borrower fails to pay the agreed amounts to the existing bank the new bank cannot claim his share from neither the existing bank nor the borrower. Only the existing bank has a right to claim the money from the borrower as the new bank has no contract with the borrower and the borrower cannot be obliged to pay the new bank. The new bank voluntarily accepts the risk involved in case the borrower turns insolvent. In Llyods TSB Bank plc vs. Clarke the court opined that it was a case of sub-participation although the language of the contract gave an indication that it was an assignment. In such a transfer there is a double risk involved. [35] The original bank does not sell or part with the loan given to the borrower with the new bank, it merely accepts an amount from the new bank under a contract and agrees to pay it back in equal ratio of its participation as and when it receives the amount from the borrower. Thus, the new bank in such a situation is at a double risk, firsty the risk of the borrower not paying the amount to the existing bank and secondly of the existing bank failing to make the payment even after receiving the amount from the borrower. [36] 

The main reason of making such a transfer by the existing bank is to share the risk of the amount lent to the borrower. Thus we can say that participation diminishes the risk of the existing bank and doubles the risk of the new bank. Another issue involved in such a transaction is that of confidentiality. The existing bank disclaims itself from any information disclosed any to the participant. The reason being the a consent is required from the borrower by the existing bank to disclose any such information. [37] 

The original loan agreement between the existing bank and the borrower has nothing to do with the participating bank and thus the participating bank is not benefitted from it in any manner. This makes it important to deal with issues like market disruption, increase in tax and costs, veto power, power to consent etc to be dealt carefully in the participation agreement. The new bank not being the creditor of the borrower cannot get a set-off in the amount shared by it with the existing bank. If there is a set-off between the borrower and the existing bank it shall only be treated as an amount paid by the borrower to the existing bank and the new bank shall receive its share on pro-rata basis. [38] Thus there can be no set-off between the new bank and the borrower. [39] The same rule applies to securities and guarantees. The new bank may be benefitted by receiving proportionate share from any such securities and guarantees being received, though it would only be treated as a payment received by the borrower. [40] 

An important aspect of sub-participation is that the existing bank maintains a direct relationship with the borrower and the new bank has no contractual or any other relationship with the borrower. Moreover, the borrower is usually unaware of any such sub-participation as such transfer takes place in a silent or confidential manner. [41] 

As a result, the new bank may wish to impose an obligatory duty over the existing bank to seek its consent before making any waivers or changes in any conditions of the loan with the borrower. Such a condition is beneficiary to the new bank though the existing bank may resist from such a condition being imposed upon it. The reason being that if such a condition is imposed upon the existing bank it may be bound to act against the policies. Most bankers in England deal with such a situation in a manner that would not breach the confidentiality of the borrower. It may either consult the borrower for its views on such participation or restrain itself from making any such changes that need to be consulted with the new bank. [42] 

Thus in my view participation may be the most preferred technique to transfer a loan as it merely diversifies its risk in the loan given to the borrower and does not sacrifice the original banker-customer relationship. The seller may also consider that this technique attracts minimum legal restrictions and costs in the form of U.K. Stamp duty and SDRT can easily be avoided by such a technique. However, a buyer may be reluctant to use this technique of transfer as it does not provide any direct rights over the borrower and thus the buyer is exposed to a double credit risk.

Chapter 6

Comparison and suitability of each method in different situations:

Assignment can only be used to transfer rights and benefits and obligations cannot be transferred by using this technique of loan transfer. In order to facilitate a transfer of rights as well as obligations the only technique that can be used is novation. Participation is a technique used to receive a share from a third party in respect of the loan given to the borrower. [43] 

Assignment and novation agreements needs to be technically drafted as failure to regard the local laws may result in severe adversity. On the other hand participation agreements are uncomplicated and simple and do not involve much technicality. [44] 

Assignment as per the English law is generally possible if it does not prejudicially affect the position of the borrower and is not prohibited by a clause in the loan agreement. Novations on the other hand requires consent of all parties as it is done by replacing the old agreement with a new one. Participation is not subject to any such restrictions and can be carried out easily by an agreement between the existing bank and the new bank. [45] Thus in my opinion participation is the most convenient technique of making a transfer of a loan as it does not need the consent of the borrower and is away from restrictions that may be incorporated in the original loan agreement.

Both assignment as well as novation exposes the borrower in front of a third party i.e. the buyer thus requires the local laws on confidentiality to be carefully referred to before making such transaction. However, confidentially is not breached by transferring a loan by mode of participation as it takes place in manner in which the borrower does not get exposed to the participating bank and also the seller is not liable to disclose any information regarding the borrower to the buyer. [46] Thus in my view participation is the most harmonious method of making a transfer of a loan.

Penn, Shea and Aurora points out that a lender may wish to keep the banker customer relation intact and may not want the customer to know about the loan transfer as it might cause the customer to lose faith in the banker. In such a situation a banker can only use participation as a technique to transfer loan. On the other hand a bank may wish to completely replace the existing bank and have a direct banker-customer relation with the borrower, in such a case the bank may resort to novation as a technique to transfer the loan in its favour. In assignment of loan the new bank deals with the borrower directly in accordance with the agreement. Thus it gives a view that assignment is a better mode for buying a loan as the buyer gets an opportunity to do future dealings with that customer.

By using assignment or novation as a method of transferring loan the new bank has the benefit of receiving the interests in debts etc. which may help the buyer of taking benefits of tax credit. The new bank may participate in the restructuring as it is linked directly with the borrower. However, the new bank has no direct connection with the borrower and hence has no privilege against the borrower. (Principals of banking law, second edition, Cranston, pg 365) Thus the buying bank is deprived from receiving the interest and other benefits if he chooses to buy a loan by way of participation.

Under the English law, failure to provide a written notice of assignment does not invalidate the assignment in itself but affects the priority rights of the buyer against the future assignees adversely. On the other hand novation requires no such notice as it is done by making a tripartite agreement between the existing bank, the new bank and the borrower. Participation like novation does not require a notice to the borrower, however it is very different from the above two in a sence that no notice is given to the borrower and neither is he a party to the new contract. Thus mostly the borrower is left unaware of the participation being taken place. [47] 

The loan agreement generally lays down the procedure for assignment and any limitations thereto in the original loan agreement. Such procedure or limitation shall be duly followed in order to attain a legal assignment. On the other hand a novation certificate is generally included in the loan agreement by which the borrower agrees to novate the loan with any new bank which the existing bank chooses. Participation has nothing to do with the original loan agreement as it being a separate agreement between the existing bank and the new bank to which the borrower is not a party and mostly is not even made aware. [48] 

Unlike participation, in novation as well as assignment the buyer obtains a direct claim and direct interest in the moneys paid by the borrower. Thus there is less amount of risk involved for the buyer in buying loan through assignment or novation than in participation As the buyer has no claim over the buyer directly neither can he be benefitted by selling the securities deposited by the borrower. This means that the borrower can take no direct recourse against the borrower to receive any amount. [49] 

Another aspect of comparison is of the sellers Authority to vote and make decisions in respect of the loan. A seller by transferring the loan through assignment or novation also transfers its authority and right to vote and make decisions. However, when a transfer made through participation the seller retains all its rights to make decisions and regulate the loan without any interference from the buying bank. Although in rare circumstances the buyer and seller may agree to consult the buying bank before exercising any such right. Though mostly resisted by sellers, sometimes the veto rights are also given to the buying bank through incorporating relevant clause in the participation agreement. [50] Novation and assignments are legal terms whereas participation is merely a business-related term. The term participation means to participate or contribute. Thus we can say that the participant does not actually purchase the loan in the true legal sense but merely contributed an amount with the existing bank without making any purchase as such. [51] (Financial Law, Joana Benjamin, 2007, Pg 530)

No matter which method is chosen by the parties to effect a sale of loan, the legal rules on fraud, misrepresentations and making false statements etc. apply to all the methods of transferring a loan. The selling bank usually includes an exclusion clause excluding it from the credit information regarding the borrower. Such exclusion clauses are drafted and included as per the local laws and limitations. [52] 

The influence of local laws on the method by which the sale of loan has been effected plays an important role in selecting a particular method over the another. One might think that in order to transfer a loan in England, only the U.K. laws has to be considered. However this is not appropriate to ignore the local laws of the borrower or the guarantee in respect of each method of transferring the loan as the enforcement of debts and rights of third parties may be evaluated only by the courts of the borrower. The influence of local laws can be commonly seen in the transfer that takes place through the process of assignment or novation. On the other hand local laws does not influence the participation technique as much as they the other two techniques. Thus it would be and aspect to look upon by both, the buyer and the seller before selecting a particular method os sale of loan. [53] 


A bank may wish to transfer a loan to another bank for various reasons and there are various techniques available to facilitate such a transfer. Now the question that arises before a bank is to which technique to be used to facilitate the transfer so as to meet the legal and favourable circumstantial requirement of the bank?

While making a selection of a technique to transfer a loan it is imperative for a bank to keep in mind the reasons for making such a transfer and the desired outcome. In my opinion the most important role in selection of a particular method is played by the circumstances surrounding a particular proposed transfer.

A bank may wish to transfer a loan by way of assignment if it wishes to transfer its rights and rights alone to another bank if it wishes to give the buyer a direct claim over the borrower. However, while making such a selection a bank must keep in mind that that by transferring its rights in the loan through assignment it is losing the direct banker-customer relationship and now the new bank shall have a direct relationship in the underlying loan with the borrower. If a bank after looking at all the aspects decides to assign a loan to a new bank, it might be a situation where there is an assignment prohibition clause in the loan agreement, then the bank cannot use assignment as the technique to transfer the loan although it might be the most favourable technique available in a particular situation.

On the other hand if there is an assignment prohibition clause in the loan agreement, and the selling bank wishes to sell the loan to another bank, it can do so by way of participation. Participation in my view is the best available technique for a transfer of a loan from the sellers point of view. The reasons being that firstly participation keeps the original banker-customer relationship intact and retains its claim over the debt of the borrower. Secondly, If a seller sells a loan to a bank by way of participation it merely diversifies its risk and does not part with its claim over the securities of the borrower. Moreover it is not liable to make any payments to the participation bank until and unless it receives the same from the borrower. And lastly it doesn’t need the consent of the borrower to make such a sale which takes it out of the ambit of any prohibition clauses in the loan agreement. However, it might not be the preferable technique for transferring a loan from the point of view of the buyer as it creates a double credit risk on the participating bank. The participating bank does not get any direct claim over the borrower and will only be paid as and when the borrower makes the payment to the original lender.

In a situation where a need to transfer the obligations along with the rights arises, the only option available with the bank to make such a transfer is by way of novation. The English law does not allow obligations to be transferred by way of a contract and thus in order to make such a transfer a new tripartite agreement is entered into by the selling bank, the buying bank and the borrower. It is a cumbersome process as it requires the consent of all the parties, however the circumstances plays the role in selecting such a process. There is no other technique available to transfer obligations and thus to transfer obligations, novation is the only method that can be used in such a situation.

Thus the factors that decide which technique is to be used differs from party to party and is subjective. Which technique of transfer shall be preferred over the others to facilitate a transfer depends upon whether a bank is a buyer bank or a seller bank?, Whether banker-customer relationship may be sacrificed or not?, Whether there are any prohibitions in the original agreement against a particular transfer?, Whether consent is given by the parties wherever required or not and whether rights are to be transferred or obligations?

Thus, the decision of selecting the mechanism for transfer of a loan can only be made after answering the above questions.