RBI sets up panel to develop secondary market for corporate loans

Last Updated: Thu, May 30, 2019 15:16 hrs
A man checks his phone outside the Reserve Bank of India (RBI) headquarters in Mumbai

Mumbai: The Reserve Bank of India on Wednesday constituted a task force on development of secondary market for corporate loans.

The six-member task force will have T. N. Manoharan, Chairman of Canara Bank, as its chairperson and will submit its report by the end of August 2019.

The RBI said that the terms of reference of the task force would include review of the existing state of the market for loan sale or transfer in India as well as the international experience in loan trading.

Further the task force will be required to make recommondations on "required policy or regulatory interventions for facilitating development of secondary market in corporate loans, including loan transaction platform for stressed assets".

Also, it will work for the "creation of a loan contract registry to remove information asymmetries between buyers and sellers, its ownership structure and related protocols such as standardization of loan information, independent validation and data access".

The secondary loan market in India, the RBI said, is largely restricted to sale to asset reconstruction companies and ad hoc sale to other lenders including banks, and no formalised mechanism has been developed to deepen it.

"A vibrant, deep and liquid secondary market for debt would go a long way in increasing the efficiencies of the debt market in general and would aid in resolution of stressed assets in particular," the central bank said.

A well-developed secondary market for debt would aid in transparent price discovery of the inherent riskiness of the debt being traded, it said.

Additionally, the RBI said such price discovery would spur innovations in the securitisation market as well as invigorate dormant markets such as corporate credit default swaps (CDS).

"These would in turn provide with early warning signals regarding the riskiness of the debt being held by the banks which would incentivize improving the underwriting and origination standards," it added.