RBI task force for allowing FPIs to directly purchase distressed loans

There should be a central loan contract registry, the task force suggested

A task force set up by the Reserve Bank of India (RBI) on Tuesday recommended a slew of measures for developing a secondary market for corporate loans, including easing of regulations to allow foreign portfolio investors (FPIs) to directly purchase distressed loans from banks.

It suggested an online portal for conducting auction and sales of corporate loans, and that a self-regulatory body (SRB) should outline the modalities for such a market. 

These moves are aimed at developing India’s credit markets and come at a time when non-banking financial companies (NBFCs) are facing a liquidity crunch after the IL&FS crisis last year.

FPIs, who so far were allowed to invest in stressed assets through asset reconstruction companies (ARCs), can directly participate in the bad loan market within an annual limit set by the RBI in consultation with the government, the task force, led by Canara Bank Chairman T N Manoharan, suggested. 

It further said regulations issued by various regulators should be amended to allow participation of non-banking entities such as mutual funds, insurance companies, and pension funds. 

There should be a central loan contract registry, the task force said.

“An active secondary market for corporate loans may result in a productive and optimal deployment of capital by banks, which will have a consequential positive impact from a fiscal perspective for the government,” it said. 

 

Banks would benefit from capital optimisation, liquidity management, and risk management, and will lead to additional credit creation at the economy-wide level. The principal benefit to the borrowers would be lower cost of capital, greater credit availability, and developing new relationships with bank and non-bank providers of capital. 

“The development of a secondary loan market will also enable enhanced return opportunities for smaller banks, NBFCs, insurance companies, pension funds and hedge funds,” the task force said.

However, no such market exists in general, except for retail loans.

Principal factors that have impeded the development of this market are the absence of a systematic loan sales platform, lack of standardisation in the documentation and legal factors. Additionally, there is a lack of active participants and lack of an effective price discovery mechanism, the task force found.

“In consultation with Indian Banks Association (IBA), Finance Industry Development Council (FIDC), the SRB may specify standardised documents for all such loans with a notified date from which these loans shall be compliant to new standards,” said the report.