For the first time ten major lenders, including State Bank of India, ICICI Bank, Canara Bank and Standard Chartered Bank, have joined hands to set up an online platform for trading of corporate loans in the secondary market.
It has been formed on the recommendation of the Reserve Bank of India’s Task Force on the Development of Secondary Market for Corporate Loans and is called the Secondary Loan Market Association (SLMA).
The other members are Kotak Mahindra Bank, Deutsche Bank, Bank of Baroda, Punjab National Bank, Axis Bank and HDFC Bank.
Currently, the secondary market for corporate loans is mainly inter-bank transactions, undertaken on an ad hoc basis through transfer of loan accounts from one bank to another, and sale of stressed assets by banks to Asset Reconstruction Companies (ARCs). While banks have been successful in transferring a chunk of their stressed loan portfolio to ARCs in recent years, the inter-bank transactions of loan accounts have been relatively infrequent.
The secondary market can give smaller banks a chance to participate in taking exposures and the constraints faced under the Large Exposure Framework will be a thing of the past. Smaller banks are generally constrained for many reasons from participating in large and creditworthy lending exposures at the time of origination.
According to SLMA’s memorandum of association, it will facilitate, promote and set up an online system for the standardization and simplification of primary loan documentation, and other trading mechanisms for the secondary loan market.
SLMA will promote standard trading, settlement and valuation procedures and practices. They will also set rules and timelines for the members for conducting the business and fix transaction-related charges.
Currently, the primary and secondary markets are restricted to banks and non-banking finance companies and domestic and foreign investors participate only in distressed debt through ARCs. As such, there is a felt need to expand the spectrum of investors in the secondary market and Alternative Investment Funds/mutual funds to invest in the secondary loan market.
Will Banks Benefit?
According to the RBI Task Force report, an active secondary market will deliver significant benefits to banks in the form of capital optimization, liquidity management and risk management. This would, in turn, lead to additional credit creation at the economy wide level.
For borrowers, the benefits would be lower cost of capital, greater credit availability, and developing new relationships with bank and non-bank providers of capital.
The secondary market for loans will evolve on the strength of a systematic digital loan trading platform, standardization of documents, active participation by stakeholders and effective price discovery mechanism.
IBA is actively working on the development of a syndicated loan market and one of the key success factors for it will be the parallel development of a secondary market for sale of loans.
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