A task force set up by the Reserve Bank of India (RBI) submitted its report on the development of a secondary market for corporate loans on Tuesday.
The task force headed by Canara Bank chairman T.N. Manoharan recommended setting up of a self-regulatory body (SRB), which will oversee the proposed secondary market.
The SRB may be set up as an association by scheduled commercial banks, public financial institutions and other related entities, and may be incorporated as a Section 8 company under the Companies Act, 2013. It must be set up within three months from the date of acceptance of the recommendations, the report added.
The SRB’s role will be to standardize loan documentation and covenants, periodically review the documentation, ensure standardization of practices, and promote growth, liquidity, efficiency and transparency of the proposed secondary market. It will also be responsible for setting up a central loan contract registry, which will finalize the detailed design structure, infrastructure, technological aspects and nature of incorporation, to ensure legal sanctity of its operations and for executing agreements with other agencies.
The Task Force also recommended setting up of an online loan sales platform to conduct auctions of secondary market loans. It said term loans have to be prioritized for the auction and, subsequently with experience, other categories of loans, such as revolving credit facilities (cash credit, credit card receivables, etc.), assets with bullet repayment and non-fund based facilities, could be introduced.
Other recommendations of the Task Force include linking the pricing of all loans to an external benchmark as the current Marginal Cost of Funds Based Lending Rate (MCLR) may not be comparable across banks.
It said the SRB may stipulate minimum 5-10% of the loan outstanding as the threshold limit for the loan size eligible for sale. It also recommended amendments in regulations to enable participation of non-banking entities such as mutual funds, insurance companies and pension funds.