Development Of Secondary Market To Boost Corporate Loans: RBI Report

The Reserve Bank of India (RBI) on September 3, 2019 has constituted a task-force to facilitate development of secondary market in corporate loans, thereby designing market structure for loans, sales and auctions, which includes online platforms and the related trading and transaction reporting infrastructure. The task force is headed under the chairmanship of Shri T. N. Manoharan, Chairman of  Canara Bank. The said task-force has submitted its recommendations to the Governor. The recommendations include, “Creation of a loan contract registry to remove information asymmetries between buyers and sellers, its ownership structure and related protocols such as standardisation of loan information, independent validation and data access,” as stated in the report. The task force has also proposed amendments in regulations of SEBI, IRDA and PFRDA to boost the participation of non-banking entities such as mutual funds, insurance companies and pension funds. 

Further they are also looking at amending the regulations with respect to securitisation and assignment of loans, asset reconstruction, foreign portfolio investment and external commercial borrowings. As per the task force, a creation of active secondary market will benefit banks, borrowers and other market participants. “For banks, the principal benefits would be capital optimization, liquidity management and risk management. This would in turn lead to additional credit creation at the economy wide level. For borrowers, the principal benefits would inter alia be lower cost of capital, greater credit availability, and developing new relationships with bank and non-bank providers of capital.” 

That said, task force is of the view that an active secondary market for corporate loans will boost productive and optimal deployment of capital by banks, this in turn will have a consequential encouraging impact from a fiscal viewpoint for the Government. Considering heavy reliance on bank finance by large Indian borrowers, taskforce predicts a huge potential when it comes to institutionalised secondary market for corporate loans.