Secondary Corporate Loan Market To Ensure Better Use Of Bank Capital: RBI Task Force

A task force set up by the Reserve Bank of India has recommended that a self-regulatory body consisting of participants be created, which will come up with specific modalities on developing a secondary market for corporate loans.

The task force, headed by Canara Bank Chairman TN Manoharan, felt that a secondary market for corporate loans would ensure better deployment of capital by public sector banks and would effectively reduce the dependence on bank financing for Indian corporates. The task force, created on May 29, submitted its report to the banking regulator on Tuesday. The RBI has sought public comments on the recommendations by Sept. 30.

As part of its recommendations, the task force stated that the self-regulatory body in consultation with the Indian Banks’ Association and Finance Industry Development Council would come up with a standardised documentation format for all types of lenders to follow. All new corporate loans and loans up for renewal would be documented as per this standardised format, the task force said.

The self-regulatory body would then work on creating a platform for secondary sale of corporate loans. Within three months of setting up such a platform, all sales of loans following the standardised format would then be mandatorily conducted on it, the task force suggested.

For older loans or those not up for immediate renewal, the task force recommended a timeline to be followed for documentation under the standardised format and eventual sale. In case of single borrowers where the aggregate loan exposure of banks and non-banking finance companies is Rs 1,000 crore or above, the time period is set at two years. For single borrowers with aggregate exposure between Rs 500-1,000 crore, the timeline prescribed is three years. Within four years, all single borrower loans would have to follow the standards set by the self-regulatory body and be sold only on the platform it has created, it said.

The task force has also recommended setting up a central loan contract registry to make it easier to track when individual loans were sanctioned and sold.

While scheduled commercial banks are expected to participate in the proposed secondary market, the task force has also recommended that non-banking finance companies, asset reconstruction companies, public financial institutions, insurance companies, pension funds, mutual funds, alternative investment funds and foreign portfolio investors may also be allowed to participate and ensure liquidity and orderly development of the market.

The task force has also recommended that respective regulators of all these entities bring in necessary regulatory amendments to ensure this works smoothly.

The RBI may also introduce incentives to deepen the market from time to time. The Government of India can prescribe key performance indicators for public sector banks which may encourage secondary sale of loans, the task force said.

According to the task force, the current secondary market for loan sales largely consists of securitisation and purchases by asset reconstruction companies.

This market faces issues including the lack of sufficient active participants, lack of an efficient price discovery mechanism, absence of a systematic loan sale platform, information asymmetry and lack of standardised documentation of loan sales or transfers.

While the securitisation market has largely developed in the retail loan space, it also faces the problem of not being able to transact in non-performing assets, the task force said. Bilateral loan sales between banks have been fewer, while the ARC market also faces problems like lack of adequate capital, pricing, market-related problems in aggregating loans among others.

According to RBI data, 96,303 borrowers have aggregate bank exposure of Rs 5 crore and above. Of this, 1,307 borrowers are those with individual aggregate exposure of Rs 1,000 crore and above. These borrowers alone could kick-start the entire process of developing a secondary market.

An active and institutionalised secondary market for corporate loans would help in dealing with these issues and would also enable adequate flow of credit in the economy, the task force said. To be sure, the secondary market would allow transactions in standard as well as bad loans.