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How a secondary loan market will benefit banks

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In the first step towards building a secondary loan market in India, 10 banks including State Bank of India (SBI) and ICICI Bank came together last week to set up the Secondary Loan Market Association (SLMA), where lenders will trade corporate loans. Mint explains how it will work.

In the first step towards building a secondary loan market in India, 10 banks including State Bank of India (SBI) and ICICI Bank came together last week to set up the Secondary Loan Market Association (SLMA), where lenders will trade corporate loans. Mint explains how it will work.

How will the SLMA operate?

The SLMA has been set up as a self-regulatory body following the recommendation of a Reserve Bank of India (RBI) task force on developing the secondary loan market. Apart from SBI and ICICI Bank, it includes Canara Bank, Standard Chartered Bank, Kotak Mahindra Bank, Deutsche Bank, Bank of Baroda, Punjab National Bank, Axis Bank and HDFC Bank. It will build an online system for the standardization and simplification of primary loan documentation, and standardization of the purchase and sale/assignment documentation and other trading mechanisms for the secondary loan market.

How will it benefit lenders?

The SLMA will help banks manage loan portfolios to comply with regulatory capital requirements. Banks can sell specific loans which could open up more lending opportunities. It also helps banks manage asset-liability mismatches, adhere to RBI’s large exposure framework and trim concentration risk. It also provides opportunities for small banks to participate in highly creditworthy lending exposures at the time of origination. In case of potentially stressed borrowers, the secondary market helps banks reduce the overall recovery cost as the lenders can go for an immediate realization of value even before a default.

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What is the current size of this market?

Bloomberg data shows that the volume of rupee syndicated loans stood at 0.94 trillion till July 2021, 2.18 trillion in 2020, and 1.68 trillion in 2019, which is expected to go up with the debut of the SLMA. RBI data shows 96,303 borrowers have an aggregate credit exposure of 5 crore and above, with 266 of them having an aggregate exposure of 5,000 crore or above.

How will it benefit companies?

The secondary market helps larger borrowers widen their lender base, avoiding funding uncertainties associated with having banking relationships with a few lenders. It also helps them gain better access to market participants with different risk appetites by multiple trenching of loans. The secondary market for corporate loans also helps the borrower by enabling a single point of contact for their borrowing needs and provides a mechanism to retire the existing loans and avail of funds/debt at a lower cost

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