The Hindu Business Line : Now, a trading platform for bank loans

Mumbai, March 21 On the heels of announcing its plan to foray into the capital market, Financial Technologies (FT) now proposes to launch a trading platform for loans extended by banks and financial institutions.

Currently, banks buy and sell loans on a bilateral basis, but a dedicated trading platform may lead to better price discovery with the exchange standing guarantee for settlement, said a banker.

Credit Market Services (CMS), a subsidiary of FT, will initially trade in term loans offered by banks.

According to RBI’s data, the loans and advances portfolio of scheduled commercial banks stood at Rs 25,73,751 crore as of February.

Mr D. Ravishankar, Chief Executive Officer, CMS, said the first step for developing a vibrant credit market is to bring in international best practices to India.

“Credit Market Academy, a subsidiary of CMS, will help standardise the documents and processes involved in the credit market and provide a platform for undertaking research work, before the credit market is opened up for trading,” he added.

Simple procedures

CMA will get feedback from market participants and use the expertise of the Advisory Council represented by Indian Bankers’ Association, Life Insurance Council, General Insurance Council, Fixed Income Money Market and Derivatives Association of India, Association of Mutual Funds in India, etc, to create common, simple and standardised loan documentation and procedures. The advisory council is headed by Dr R.H. Patil, Chairman, Clearing Corporation of India. CMS’ trading platform will rope in banks, insurance companies, mutual funds, NBFCs, financial institutions and market intermediaries as members.

Ensuring quality

Ruling out the possibility that the proposed trading platform for loans would create a financial crisis similar to that in the US, Mr Ravishankar said, “The loans that were traded in US were mostly sub-standard quality, whereas in India we will trade in loans that are serviced by the customers. Moreover, there will be transparency in the quality of loan being traded on the exchange.”

The members of trading platform will benefit from the adoption of a common framework, introduction of uniform banking credit practices and benefits of the market mechanism.

A loan rate polling service (LRPS) is being launched shortly to capture loan rates across loan products and maturity buckets for the benefit of CMA members. Through this initiative, a database will be built and will be put up on the CMSL Web site, he said.

A vibrant credit market will help transfer risk as the institution best placed to lend is not necessarily best placed to bear the risk, said a banker. It also allows financial institutions to diversify their exposure across different sectors and geographic regions, while maintaining customer relationships.

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