RBI's task force recommends moves to ease credit markets

A task force set up by the Reserve Bank of India (RBI) has recommended a slew of measures for developing a secondary market for corporate loans, including easing of regulations to allow foreign portfolio investors (FPIs) to directly purchase distressed loans from banks.

These moves, aimed at developing India’s credit markets, come at a time when the economy is facing a liquidity crisis following last year’s collapse of IL&FS, one of the biggest lenders outside the banking sector.
FPIs, who so far were allowed to invest in stressed assets through asset reconstruction companies (ARCs), can directly participate in the bad loan market within an annual limit set by the Reserve Bank of India (RBI) in consultation with the government, the task force recommended.
RBI’s task force also recommended easing rules around the securitisation of loan assets and permitting wider participation from funds and insurance companies in trading these securities, the central bank said.
It also proposed setting up a self-regulatory body to standardize loan documents and promote transparency in the secondary market.
RBI has posted the recommendations on its website for comments from stakeholders and they are subject to the central bank’s approval.
The task force was formed in May to review the existing state of the market for loans in India and to make recommendations for the development of a secondary market for corporate loans.
RBI constituted a Task Force on Development of Secondary Market for Corporate Loans under the chairmanship of T N Manoharan, chairman of Canara Bank, on 29 May 2019. The terms of reference of the task force were to review the existing state of market for loan sale/transfer in India as well as the international experience in loan trading and to make recommendations for the development of secondary market for corporate loans in India
The Task Force has since submitted its report to the Governor. The key recommendations of the Task Force are as follows:
  • Setting up of a self-regulatory body of participants to finalise detailed modalities for the secondary market for corporate loans, including standardisation of documentation;
  • Setting up of a Central Loan Contract Registry;
  • Setting up an online loan sales platform to conduct auctions/sale process of the secondary market loans;
  • Amending the extant regulations applicable to, inter-alia, securitisation and assignment of loans, asset reconstruction, foreign portfolio investment and external commercial borrowings; and
  • Amendments in regulations issued by Sebi, IRDA and PFRDA to enable participation of non-banking entities such as mutual funds, insurance companies and pension funds.
RBI placed the report on its website on Tuesday for comments of stakeholders and members of the public. Comments on the report may be sent by 30 September  2019 through email.