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The Reserve Bank of India (RBI) has constituted a six-member committee on the Development of Secondary Market for Corporate Loans to come up with recommendations to increase the efficiencies of the debt market and aid in the resolution of stressed assets.
As per its terms of reference, the committee, headed by TN Mahoharan, Chairman, Canara Bank, will make recommendations on required policy/regulatory interventions for facilitating the development of secondary market in corporate loans, including loan transaction platform for stressed assets.
It will create a loan contract registry to remove information asymmetries between buyers and sellers, its ownership structure and related protocols, such as standardisation of loan information, independent validation, and data access.
The committee is expected to make suggestions on the design of the market structure for loan sales/auctions, including online platforms and the related trading and transaction reporting infrastructure; and the need for, and role of, third-party intermediaries, such as servicers, arrangers, and market makers.
It will suggest appropriate measures for enhanced participation of buyers and sellers in loan sale/transfer.
The RBI said the secondary loan market in India is largely restricted to sale to asset reconstruction companies (ARCs) and ad-hoc sale to other lenders, including banks, and no formalised mechanism has been developed to deepen the market.
“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 will aid in resolution of stressed assets in particular.
“A well-developed secondary market for debt will also aid in transparent price discovery of the inherent riskiness of the debt being traded,” the RBI said in a statement.
Additionally, such price discovery will spur innovations in the securitisation market as well as invigorate dormant markets such as corporate credit default swaps (CDS). These will, in turn, provide early warning signals regarding the riskiness of the debt being held by the banks, which will incentivise improving the underwriting and origination standards.
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