Secondary Market for Corporate Loans - Manoharan Committee

Why in news?

The task force set up by the RBI to examine the possibilities of a secondary market for corporate loans in India submitted its report recently.

What is a secondary market?

• When a company issues its securities for the first time, it does it in the primary market.
• After the IPO (Initial Public Offering), those securities get available for trade in the secondary market.
• A secondary market is thus a marketplace where already issued securities (both shares and debt) can be bought and sold by the investors.
• It is a market where investors buy securities from other investors, and not from the issuing company.
• Equity shares, bonds, preference shares, treasury bills, debentures, etc. are some of the key products available in a secondary market.
• SEBI functions as the regulator for the secondary market.

What are the key suggestions?

• The task force was led by Canara Bank Chairman T N Manoharan.
• It suggested creating a self-regulatory body (SRB) to manage the secondary market.
• This would develop appropriate benchmark rates for secondary market purchase and sale of corporate loans.
• The SRB is expected to also finalise detailed modalities and formulate guidelines.
• It would -
  1. standardise the paperwork associated with loans, making them easier to trade
  2. maintain the standards and examine documentation
  3. maintain a central registry, and so on
• Aside from the creation of this quasi-regulator, the committee also suggested that existing requirements be changed.
• It said the secondary market for corporate loans, currently dominated by banks, be thrown open to mutual funds, pension funds, and insurance companies.
• To start with, it was recommended that term loans be prioritized for sale in the secondary market.
• Subsequently, depending upon the experience gained, other categories of loans like revolving credit facilities should follow suit.
• These include cash credit, credit card receivables, assets with bullet repayment and non-fund based facilities.

What is the committee’s rationale?

• The secondary loan market in India is largely restricted to sale to Asset Reconstruction Companies and ad-hoc sale to other lenders, including banks.
• Notably, no formalised mechanism has been developed to deepen the market.
• Banks and NBFCs are currently the only participants in the primary and secondary loan markets.
• So, the taskforce felt that it was essential to widen the spectrum of participants to boost the secondary market.
• Besides, the secondary market in corporate debt is so illiquid.
• In the absence of sufficient liquidity, the market is not properly passing the price information about companies.
• So, a more structured form of price discovery would be far more efficient.

What is the way forward?

• Greater innovation and regulatory cohesion are needed across the board for debt and loan markets.
• This must be the priority for growing long-term finance and better pricing of debt.
• This is crucial to avoid investment crises such as those India is enduring.

Source: Economic Times, Business Standard