RBI constitutes task force on secondary market for corporate loans

The Reserve Bank of India (RBI) on Wednesday constituted a task force on the development of secondary market for corporate loans.

In India, banks sell their stressed loans to the asset reconstruction companies, but has practically no other alternatives. However, globally, there is a healthy corporate loan market where banks can offload their stressed assets and those get traded. Credit Default Swaps (CDS) against these loans also get developed as a result.

“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. A well-developed secondary market for debt would also aid in transparent price discovery of the inherent riskiness of the debt being traded,” the RBI said in a statement.

In April policy, the RBI had suggested composition of such a committee.

The terms of the committee, which should submit its report by end of August, would be to suggest required policies for facilitating development of secondary market in corporate loans, including loan transaction platform for stressed assets, creation of a loan contract registry, its ownership structure and related protocols such as standardization of loan information, independent validation and data access.

The taskforce would design the market structure for loan sales/auctions, including online platforms and the related trading and transaction reporting infrastructure, and will suggest about the need for, and role of, third party intermediaries, such as servicers, arrangers, market makers, etc. It would suggest how participation can be enhanced in the market.

RBI said the development of derivatives such as CDS would also provide early warning signs “regarding the riskiness of the debt being held by the banks which would incentivize improving the underwriting and origination standards,” the statement said.

The task force would be headed by T.N. Manoharan, chairman of Canara Bank. The other members will be V.G. Kannan, chief executive officer of the Indian Banks’ Association, Bahram Vakil, founding partner of law firm AZB and Partners, Anand Srinivasan, additional director research of CAFRAL, Sajjid Z. Chinoy, chief India economist of J P Morgan, Abizer Diwanji, head of restructuring and turnaround services at EY India.