A financial trader speaks on a fixed line telephone while monitoring data on computer screens on the trading floor inside a stock exchange. (Photographer: Jasper Juinen/Bloomberg)

Banks Look To Create Loan Trading Platform In India

Indian banks are looking to kick start active trading in loans, particularly bad debt, as they seek ways to deal with more than Rs 10 lakh crore in stressed assets. The proposal is a part of the wider ‘Sashakt’ plan put forth earlier this month by a committee of bankers headed by Punjab National Bank Chairman Sunil Mehta.

Such a platform would allow trading of both performing and non-performing loans, said the committee report. The platform can be used to trade loans between banks and with non-bank investors, according to the committee report, a copy of which has been seen by BloombergQuint. Hindu Business Line first reported the plan to set up such a platform.

The plan comes a few months after the idea was mooted by Reserve Bank of India Deputy Governor Viral Acharya. In January, Acharya had proposed that the Indian Banks’ Association, the Association of Asset Reconstruction Companies and credit rating agencies come together to create a debt trading platform in line with international practices.

For India, bankers are proposing that an online trading platform be set up, which can be used to sell performing and non-performing loans. The same platform can be used for live auctions of distressed loans, said the report. Such a platform would also encourage transparency and make it easier for public sector banks, who may be reluctant to sell loans due to concerns over scrutiny by investigative agencies.

A live and transparent bidding auction mitigates the risk of potential impropriety, said the report.

According to the bankers’ panel, such a platform can also help improve price discovery for stressed assets by reducing delays in the resolution process. The lenders also said that such an auction process would help reduce the risk of cancelled bad loan auctions. This is common in India as asset reconstruction companies and banks often fail to agree on the final price of a stressed asset.

Eventually, such a platform would help develop an active market for credit default swaps, the bankers’ panel said.

Also read: Sashakt Means Empowered... To Make No Decisions

The time for such an idea has come, said Harish Chander, executive vice president at Edelweiss Asset Reconstruction Company. Chander said that there are a few pre-requisites for the platform to work. Key among them is getting all banks to come together and sell the loan together. It would also be important for bankers to devise a way to ensure that individual banks can be compensated based on the nature of securities they hold against their loan amounts, he said. Chander explained that often banks who have stronger collateral seek a larger payout when bad loans are sold. If the consortium does not agree to this, loan sales get stalled.

This is an idea which the RBI has been keen on. If it takes off, the industry will benefit in the long run.
Harish Chander, Executive VP, Edelweiss ARC

He added that the platform should ideally be run either by the RBI or the Indian Banks Association.

Also read: Lenders Bank On ‘Sashakt’ Plan To Dull The Bad Loan Pain. But Will It Work?