Money & Banking

10 top banks create secondary market for corporate loans

Our Bureau Mumbai | Updated on August 12, 2021

Set up an online platform for debt trading

Ten major lenders, including State Bank of India, ICICI Bank, Canara Bank and Standard Chartered Bank, have for the first time joined hands to set up an online platform for trading of corporate loans in the secondary market.

Called the Secondary Loan Market Association (SLMA), it has been formed on the recommendation of the Reserve Bank of India’s Task Force on the Development of Secondary Market for Corporate Loans.

Kotak Mahindra Bank, Deutsche Bank, Bank of Baroda, Punjab National Bank, Axis Bank and HDFC Bank are also its members.

Wanted: A secondary market for bank loans

Currently, the secondary market for corporate loans is mainly inter-bank transactions, undertaken on an ad hoc basis through transfer of loan accounts from one bank to another, and sale of stressed assets by banks to Asset Reconstruction Companies (ARCs). While banks have been successful in transferring a chunk of their stressed loan portfolio to ARCs in recent years, the inter-bank transactions of loan accounts have been relatively infrequent.

Saurav Sinha, Executive Director, RBI, said that since smaller banks are generally constrained for various reasons from participating in large and creditworthy lending exposures at the time of origination, the secondary market can give them a chance to participate in taking such exposures and the constraints faced under the Large Exposure Framework will be a thing of the past.

Bonding together

Online system

According to SLMA’s memorandum of association, it will facilitate, promote and set up an online system for the standardisation and simplification of primary loan documentation, and other trading mechanisms for the secondary loan market.

SLMA will also promote standard trading, settlement and valuation procedures and practices; set rules and timelines for the members for conducting the business: and fix transaction-related charges.

Ashwini Bhatia, Managing Director, SBI, said that presently the primary and secondary markets are restricted to banks and non-banking finance companies and domestic and foreign investors participate only in distressed debt through ARCs. “As such, there is a felt need to expand the spectrum of investors in the secondary market and Alternative Investment Funds/mutual funds to invest in the secondary loan market,” he said.

Will benefit banks

According to the RBI Task Force report, an active secondary market will deliver significant benefits to banks in the form of capital optimisation, 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 be lower cost of capital, greater credit availability, and developing new relationships with bank and non-bank providers of capital.

Sanjay Srivastava, Chairman, SLMA, said the secondary market for loans will evolve on the strength of a systematic digital loan trading platform, standardisation of documents, active participation by stakeholders and effective price discovery mechanism.

Sunil Mehta, Chief Executive, Indian Banks’ Association, said the IBA is actively working on the development of a syndicated loan market and one of the key success factors for it will be the parallel development of a secondary market for sale of loans.

 

Creditable Move

State Bank of India, ICICI Bank, Canara Bank and Standard Chartered Bank, Kotak Mahindra Bank, Deutsche Bank, Bank of Baroda, Punjab National Bank, Axis Bank and HDFC Bank are members of Secondary Loan Market Association

The secondary market for corporate loans largely involves inter-bank deals or sale to Asset Reconstruction Companies

Will benefit banks in the form of capital optimisation, liquidity management and risk management, leading to credit creation economy wide level

For borrowers, key benefits would be lower cost of capital, greater credit availability, and developing new relationships with bank and non-banks

 

Published on August 11, 2021

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