The functioning of secondary market for corporate loan will enable trading of corporate loans among the Banks within the Association. This may be slowly extended to others outside the Association and also to shadow banks. The trading of Corporate Loan means, the exposure of one bank, pertaining to a corporate may be traded with another Bank partially on selected credit facility and or fully with all the credit facilities under one common loan documents applicable for all the Banks within the syndicate/ Association. Such trading may be at a premium and or at discount depending on the corporate’s rating and credibility.

For example, X corporate enjoys fund based and non-fund based limits with A bank then this A bank can trade its exposure under the non-fund-based limits alone to B bank and retain the fund-based exposure with itself. It can trade vice versa also besides trading all the credit facilities together. If X co is of high standing in the market, then, the facilities will be traded with premium on exposure by sharing part of the premium with the corporate. Such selected trading will take place depending on the liquidity available with the Banks, Capital available for expanding the balance sheet, mitigating over all risks etc. In this process, corporate itself can engineer the trading by negotiating the price of exposure already enjoyed with a Bank with that of another Bank and transfer it.

Such trading options will lead to 1) facilities enjoyed by one Co with a Bank can be transferred to another Bank through trading depending on the needs of the Banks and also of corporate thereby creating a volatile environment of corporate lending and acquiring corporate loan through trading. 2) Big Banks with large exposure to corporate can downsize their exposure by trading loans to smaller banks who want to increase the size of their Balance Sheet 3) Stressed Loans of Corporate in a circular trading 4) Smaller Banks can become victim in the enthusiasm to garner corporate business by agreeing to a lower price for its exposure and thereby losing and 5) the arrangement becoming a source to hide corporate default for some time.

So, the Secondary Market for trading of corporate loan will be a tool available to corporates to extract more benefits from the Bank and also to hide their default and failures. Balance sheet of Banks will have one more item in their income and expenditure account in the name of profit /loss on corporate loan trading.

Whether such initiative is needed for India is a moot question that comes to our mind that too under the present circumstances, where Banks have come out of heavy corporate loan defaults by providing through their noses and by facing heavy haircuts in the settlement processes through IBC codes. When Banks are reluctant to lend to corporates, then, creation of such market for trading of corporate loan raises apprehension in the minds of stakeholders and investors as to whether such mechanism is being devised to cover up future corporate failures.

GOI and RBI are purported to be addressing the issues arising out of economic slowdown and negative growth. So far GOI through RBI has announced various measures to maintain liquidity in the system but that has not helped the economy to revive fully. So, it would be better that instead of RBI mooting such secondary market for corporate loan trading etc it should come up with real hard measures to recover huge corporate loan defaults. This will enable Banks to have sizable capital through plough back of profits arising out of recovery of corporate loans to expand its credit exposure to push the economy forward.

That is why as AIBEA we say that GOI and RBI should ensure recovery of all bad corporate loans and not resolution with haircuts and write-off of bad loans. (IPA Service)