Banks bet on SLMA to curb loan frauds

Teaming Up For Secured Lending

- Banks' consortium will unveil an online platform

- SLMA will provide a window for managing loan assets portfolio

- SLMA will be a self-regulatory body as per RBI guidelines

SLMA will help banks

Talking to Bizz Buzz, SBI Managing Director, Ashwin Tiwari, says: An active secondary market in loans run by SLMA could help individual banks trade loans as per their risk appetite and exposure ceilings and thereby control risk

Mumbai: In a bid to avoid frauds, a consortium of banks is seriously working towards development of syndicated loan market in the country with the support of Indian Banks' Association (IBA).

The idea behind the plan is to set up Secondary Loan Market Association (SLMA), a parallel development of secondary market for sale of loans.

Need was being felt in the banking industry for a long time for wider participation in the loan market aided by appropriate risk mitigation. The SLMA will provide the banks and other participants a window for managing their loan assets portfolio.

PK Agarwal, a retired general manager of SBI, is currently associated with the project as a senior business advisor, whereas Deloitte (Risk Advisory's consultant) is project partner to act as a bridge between SLMA and the technology partner, Cognizant.

Eleven major banks including State Bank of India (SBI) and ICICI Bank have joined hands to set up SLMA for promoting growth of secondary market for loans in the country, and also unveil an online platform. The other members of SLMA include Canara Bank, Standard Chartered Bank, Kotak Mahindra Bank, Deutsche Bank, Bank of Baroda (BoB), Punjab National Bank (PNB), Axis Bank and HDFC Bank. Indian Bank was the latest to join the bandwagon whereas few more banks are likely to join soon.

As per its official site, SLMA is a self-regulatory body formed as per directions of Reserve Bank of India with the primary objective to promote the growth of the secondary market for loans in India, which it endeavours to do by formulating rules and best practices for loan trading, promulgating a suite of standard documents; engaging with regulators on key matters affecting loan markets; organizing conferences and knowledge sharing events and providing a professional networking platform for members.

The RBI-constituted Task Force committee chaired by TN Manoharan had said that an active secondary market will deliver significant benefits to banks in the form of capital optimisation, liquidity management and risk management. This would, in turn, lead to additional credit creation at the economy wide level.

For borrowers, the principal benefits would be lower cost of capital, greater credit availability, and developing new relationships with bank and non-bank providers of capital.

Supervisory data of RBI indicates that 96,303 borrowers have an aggregate credit exposure of Rs5 cr and above from the banking system, with 266 of them having an aggregate exposure of Rs5,000 cr or above.

To begin with, SLMA will be implemented for corporate loans. If the experiment was found to be successful, then it will be extended to retail loans too in future, sources familiar with the development said. The appraisal committee of RBI is likely to meet in April to take a further call towards the implementation of SLMA.

According to SLMA's memorandum of association, it will facilitate, promote and set up an online system for the standardisation and simplification of primary loan documentation, and standardisation of documentation for the purchase and sale/assignment documentation and other trading mechanisms for the secondary loan market and its documentation.

The company's website and logo were digitally launched by Saurav Sinha, executive director, Reserve Bank of India in August. Speaking at the event, Sinha had said an active secondary market for loans in India will offer benefits to various stakeholders by way of capital optimisation, liquidity management, risk management, exposure re-balancing and efficient price discovery mechanism.

Once implemented, the online platform for trading of corporate loans in the secondary market will provide the banks and other participants a window for managing their loan assets portfolio.

It has been observed that because smaller banks are generally constrained for various reasons from participating in large and creditworthy lending exposures at the time of origination, the secondary market can enable them to participate in such exposures at a later stage and the constraints faced under the Large Exposure Framework will be a thing of the past.

As per the existing system, the secondary market for corporate loans is mainly inter-bank transactions, undertaken on an ad hoc basis through transfer of loan accounts from one bank to another, and sale of stressed assets by banks to asset reconstruction companies (ARCs).

While banks have been successful in transferring a chunk of their stressed loan portfolio to ARCs in recent years, the inter-bank transactions of loan accounts have been relatively infrequent.