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Secondary Market For Corporate Loans

  • 04 Sep 2019
  • 4 min read

The Reserve Bank of India (RBI) constituted Panel, headed by T.N. Manoharan, has given some suggestions for developing the secondary market for corporate loans in the country. Suggestions are as follows:

  • Setting up a Self-Regulatory Body (SRB) of participants to finalise details for the secondary market for corporate loans, including the standardisation of documents.
  • Creating a Loan Contract Registry to remove information asymmetries between buyers and sellers.
  • Creating an online loan sales platform to conduct auctions and sale of loans.
  • Widening the Spectrum: Enabling participation of non-banking entities such as mutual funds, insurance companies, and pension funds.
  • Single loan securitisation can be considered to incentivise investors to acquire loans through the secondary market mechanism.
    • Securitisation is currently permitted only for a pool of homogenous assets.
    • Securitization is a process by which a company clubs it's different financial assets/debts to form a consolidated financial instrument which is issued to investors. In return, the investors in such securities get interest.
  • Allowing Foreign Portfolio Investors (FPIs) to directly purchase distressed loans from banks.
    • Currently, FPIs have to come through the Asset Reconstruction Companies (ARCs) to participate in the distressed loan market.
  • Linking the pricing of all loans to an external benchmark as the current Marginal Cost of Funds Based Lending Rate (MCLR) may not be comparable across banks.

Asset Reconstruction Companies

  • An Asset Reconstruction Company is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.
  • The ARCs are registered under the RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).
  • The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-Performing Assets.

Secondary Market for Corporate Loans

  • Secondary loan market in India is largely restricted to the sale of loans to Asset Reconstruction Companies and no formalised mechanism has been developed to deepen the market.
    • The secondary market is the market where investors buy and sell securities they already own.
  • A vibrant, deep and liquid secondary market for debt would go a long way in increasing the efficiencies of the debt market in general and would aid in the resolution of stressed assets in particular.
  • A well-developed secondary market for debt would also aid in transparent price discovery of the inherent riskiness of the debt being traded.
  • The secondary market for loans can also be an important mechanism for credit intermediaries to manage credit risk and liquidity risk on their balance-sheets, especially for distressed assets.

Source: Mint

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