Now, a platform for trading loans

Soon, there will be an exchange-like platform for trading in loans.

Credit Market Securities (CMSL), a wholly-owned subsidiary of Financial Technologies, is in the process of setting up the first ever platform in the country on which bank loans extended to companies can be traded. The Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) are already working on guidelines for trading in bank loans, sources close to the development said.

While banks need to maintain the prescribed level of capital when expanding their business, trading in loans will allow them grow their credit activities without necessarily putting in more capital. There are already functional trading platforms for the bond markets. The outstanding credit amount in the banking system was estimated at Rs 26,68,000 crore at the end of February 2008, and only a part would be available for trading.

Initially, CMSL is planning to launch trading in term loans. The company is planning to outsource the services of clearing and settlement. The trading mechanism will also involve brokers and intermediaries.

At present, investment bankers are doing primary deals for raising funds and they can be intermediaries in secondary market also. CMSL is also planning to launch a Loan Rate Polling System (LRPS) shortly, aimed at providing pricing benchmarks to the market.

Banks trade in loan portfolios even now, especially those related to priority sector lending. But the deals are concluded through bilateral negotiations under the overall norms as prescribed by the central bank.

Bankers said that the platform could be of special relevance for foreign and smaller private sector players. Even this year, with the financial year drawing to a close, the lenders are looking to purchase some of the assets from public sector players to meet the required lending norms.

In addition, in recent years, private banks have resorted to sale of retail assets too. These loans are sold to avoid concentration of risk to particular segments of the market.

Asset reconstruction companies (ARCs) also buy distressed loans through a process of bidding. Typically, ARCs buy the assets at a steep discount, which could be as high as 75-80 per cent of the original loan value. For banks, the transactions make sense as they can realise value from written-off loans and clean up their books.

These transactions also take place towards the end of the year. This year, assets worth at least Rs 1,500 crore are expected to be traded as banks look to clean up their books.

The RBI's go-ahead to treat certain restructured loans as standard assets, instead of classifying them as non-performing assets, is expected to lower the size of such loan deals this year.