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Reserve Bank of India (RBI) has started work on developing a secondary market for corporate loans by taking the first step: the central bank is setting up a self-regulatory body (SRB) for the market. The decision was announced in the central bank’s Statement of Developmental and regulatory Practices, which was issued along with its fifth bi-monthly monetary policy statement on Thursday.
The task force for the development of a secondary market in corporate loans, set up by RBI in the April 2019 policy statement under the chairmanship of Canara Bank chairman TN Manoharan, had recommended that the first step towards the development of the secondary market should be setting up an SRB, or self-regulatory organization as it’s known in the Western markets.
The task force’s report, submitted in September 2019, had suggested that the SRB will be required to work with different sectoral regulators, apart from standardising documentation, covenants and practices.
While RBI provided no further information on the SRB’s structure, the task force had recommended: “The SRB may be an association set-up by Scheduled Commercial Banks, Public Financial Institutions and other related entities, and may be incorporated as a Section 8 Company under the Companies Act, 2013 similar to FIMMDA or FEDAI. All the initial activities undertaken by the SRB shall be in close consultation and concurrence with the Reserve Bank of India. It is suggested that the SRB may interact with LMA, LSTA or APLMA as deemed appropriate to commence its operations and carry out its mandate in a time bound manner."
A secondary market in corporate loans is expected to provide benefits to all participants, including banks, non-banking finance companies (NBFCs), borrowers and other market participants. It will not only enable efficient price discovery for loan assets but will also help lenders optimize capital and manage both liquidity and risk.
In its recommendation, the task force felt that the main impediments in the development of a corporate loan secondary market were, “…the absence of a systematic loan sales platform, lack of standardization in documentation and legal factors. Additionally, there is a lack of active participants and lack of an effective price discovery mechanism. Developing the secondary market for corporate loans would require enablers both on the demand as well as supply side. Some of the important enablers include changes in the regulatory framework for loan sales, broad-basing of the participant base, development of specialised entities required for expansion of secondary market, creation of market infrastructure like sales platform, and standardisation of documents and practices."
Typically, the players in a corporate loan secondary market would be banks, NBFCs, corporate borrowers, a central loan contract registry, and a host of other facilitating organisations, such as the Registrar of Companies, Central Registry of Securitisation Asset Reconstruction and Security Interest and Information Utility.