A secondary market in corporate loans – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/a-secondary-market-in-corporate-loans/articleshow/84451969.cmsSynopsis

A secondary market for corporate loans would lead to diversification of credit risks, provide market-based credit products for a diversified set of investors, and, generally speaking, boost transparency in banking.

The recent Financial Stability Report of the ReserveBank of India(RBI) reiterates the need for an active secondary market for corporate loans. It would lead to diversification of credit risks, provide market-based credit products for a diversified set of investors, and, generally speaking, boost transparency in banking.

And, in institutionalising a secondary market for corporate loans, RBI has duly helped set up a self-regulatory body (SRB), termed Secondary Loan Market Association, consisting of market participants. A couple of years ago, an RBI task force, headed by Canara Bank chairman T N Manoharan, made several suggestions for a well-functioning secondary market for corporate loans. The task force report did call for an SRB. It also recommended that loan documentation be standardised, plus the setting up of a Central Loan Contract Registry (CLCR), an ecosystem for enabling virtual information-sharing with various repositories, and the development of an appropriate menu of benchmark rates to be commissioned by the SRB. It proposed that, for each corporate account, the SRB stipulate a minimum ticket size for trading as a percentage of loan outstanding.

The task force has flagged roadblocks and these need to be speedily removed. One is the glaring absence of a systemic loan sales platform, another is the lack of an ‘effective, reliable and diligent’ price discovery mechanism, and, not least, the reality of insufficient participants. Other issues include stamp duty during due diligence and transfer, and regulatory restrictions too. The bottom line is that an efficient secondary market for corporate loans would have clear-cut benefits for both borrowers and lenders and lead to an active corporate bond market as well.

Did you Know?

Stock score of Bank of India Ltd moved up by 1 in a month on a 10-point scale.

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