How a secondary loan market will benefit banks

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

How will SLMA work?

SLMA was established as a self-regulatory body following the recommendation of a Reserve Bank of India (RBI) task force on secondary loan market development. Besides 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 standardization and simplification of primary loan documentation, and standardization of purchase and sale / transfer documentation and other negotiation mechanisms for the secondary loan market.

How will this benefit lenders?

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 the RBI’s large risk framework, and reduce concentration risk. It also offers small banks the opportunity to participate in highly creditworthy credit exposures at the time of origination. For potentially stressed borrowers, the secondary market helps banks lower the overall cost of collection because lenders can seek immediate realization of value even before a default.

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What is the current size of this market?

Bloomberg data shows the volume of rupee syndicated loans was ??0.94 trillion until July 2021, ??2.18 trillion in 2020, and ??$ 1.68 trillion in 2019, which is expected to increase with the debut of SLMA. RBI data shows that 96,303 borrowers have an aggregate credit exposure of ??5 crore and above, with 266 of them having an overall exposure of ??5,000 crores or more.

How will this benefit businesses?

The secondary market helps large borrowers expand their lender base, avoiding the funding uncertainties associated with banking relationships with a few lenders. It also helps them to have better access to market players with different risk appetites through multiple loan tranches. The secondary business loan market also assists the borrower by enabling a single point of contact for their borrowing needs and provides a mechanism to withdraw existing loans and dispose of funds / borrowings at a lower cost.


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Priscilla C. Carnegie