Ten major lenders, including the State Bank of India, ICICI Bank, Canara Bank and Standard Chartered Bank, have partnered for the first time to set up an online platform for trading business loans in the secondary market.
Called the Secondary Loan Market Association (SLMA), it was formed on the recommendation of the Reserve Bank of India’s Working Group on Secondary Market Loan Development for Businesses.
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 business loans is mainly made up of interbank transactions, carried out on an ad hoc basis through transfers of loan accounts from one bank to another and the sale of distressed assets by banks to asset reconstruction companies (ARCs). While banks have successfully transferred part of their distressed loan portfolios to CRAs in recent years, interbank loan account transactions have been relatively infrequent.
Saurav Sinha, Executive Director of RBI, said that since small banks are typically forced, for a variety of reasons, to participate in large and creditworthy loan exposures at the time of origination, the secondary market may give them the possibility of participating in such exhibitions and the constraints faced within the framework of a large exhibition will be a thing of the past.
According to the constitutive act of SLMA, it will facilitate, promote and set up an online system for standardization and simplification of primary loan documentation and other negotiation mechanisms for the secondary loan market.
SLMA will also promote standard trading, settlement and valuation procedures and practices; establish rules and time limits for members for the conduct of business; and set transaction fees.
Ashwini Bhatia, managing director of SBI, said that currently the primary and secondary markets are limited to banks and non-bank financial corporations, and domestic and foreign investors only participate in distressed debt through ARCs. . “As such, there is a felt need to broaden 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 bring significant benefits to banks in the form of capital optimization, liquidity management and risk management. This in turn would lead to the creation of additional credit at the level of the whole economy.
For borrowers, the main benefits would be a lower cost of capital, greater availability of credit and the development of new relationships with bank and non-bank lenders.
Sanjay Srivastava, President of SLMA, said the secondary loan market will evolve through a systematic digital loan exchange platform, document standardization, active stakeholder participation and an effective mechanism for price discovery.
Sunil Mehta, Managing Director of the Association of Indian Banks, said the IBA is actively working to develop a syndicated loan market and one of the key success factors will be the parallel development of a secondary market for the sale of loans.
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 the Secondary Loan Market Association
The secondary market for business loans largely involves interbank transactions or sales to asset rebuilding companies
Benefit banks in the form of capital optimization, liquidity management and risk management, leading to economy-wide credit creation
For borrowers, the main benefits would be a lower cost of capital, greater availability of credit, and the development of new relationships with banks and non-banks.