Reserve Bank of India (RBI) Current Affairs - 2019

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RBI set up Task Force on Secondary Market for Corporate Loans

The Reserve Bank of India (RBI) constituted a task force on secondary market development in corporate loans.

About Task Force on Development of Secondary Market for Corporate Loans

  • Composition: It is a six-member body and is headed by Canara Bank chairman T. N. Manoharan.
  • The task force shall submit its report to RBI by end of August 2019.
  • Objective: To make recommendations to RBI on required policy and regulatory interventions for-
    1. Facilitating development of secondary market in corporate loans, which includes loan transaction platform for stressed assets
    2. Creating loan contract registry and ownership structure to remove information asymmetries between buyers and sellers.

Need:

Globally, there is a healthy corporate loan market where banks can sell their stressed assets and those assets get traded. But in India banks sell their stressed loans to Asset Reconstruction Companies (ARC’s) and sometimes ad hoc sale to other lenders (banks) but practically there is no other alternative to this and no formalised mechanism. Therefore-

  • a vibrant, deep and liquid secondary market for debt would increase efficiencies of debt market in general and would aid in resolution of stressed assets..
  • a well-developed secondary market for debt will aid in transparent price discovery of inherent riskiness of debt being traded.

Function:

  • The task force would design market structure for loan sales and auctions which will also include online platforms and other related trading and transaction reporting infrastructures.
  • It will suggest how participation can be enhanced in market and will also give suggestions on need for, and role of, third party intermediaries, like market makers, servicers, arrangers, etc.

Harsh Vardhan Committee: on Housing Finance Securitisation Market Development

The Reserve Bank of India (RBI) constituted a committee under Harsh Vardhan, to review existing state of mortgage securitisation in India and suggest measures to develop market further.

About Committee on Development of Housing Finance Securitisation Market

  • Composition: The committee constitutes a six-member panel that is headed by Harsh Vardhan, Senior Advisor in Bain & Company (a Management consulting company).
  • It shall submit its report to RBI by the end of August 2019.
  • Objective:
    1. To review existing state of mortgage backed securitisation in India and also suggests measure to deepen housing finance securitisation market.
    2. To assess role of various counterparties in securitisation process which includes servicers, rating agencies, trustees, and also suggest steps to address key risks.
  • Need: Currently the mortgage securitisation market in India is mainly dominated by direct assignments among a limited set of market participants on account of various structural factors which impacts both demand and supply side and also several prudential, legal, tax and accounting issues. Therefore, , a careful design of a robust and transparent securitisation framework assumes paramount significance for Indian economy.
  • Significance: India must also learn from international experience which shows that it is critical to address issues of misaligned incentives and agency problems which results from information asymmetry problems between originators and investors in market, which can worsen systemic risk.