RBI recommends allowing FPIs to directly purchase distressed loans

The task force formed by the Reserve Bank of India (RBI) has recommended several measures in order to develop a secondary market for corporate loans. This also includes easing the regulations to allow the foreign portfolio investors (FPIs) to directly purchase the distressed loans from banks.

RBi

The task force has recommended forming an online platform to conduct auction and sales of corporate loans. It also suggested that a self-regulatory body (SRB) should set up particular modes to carry it out in such a market.

The move is done in order to develop India’s credit market, in wake of ongoing liquidity crunch in non-banking financial companies (NBFCs) after the IL&FS crisis last year.

The task force, led by Canara Bank Chairman T N Manoharan, suggested that FPIs, who were till now allowed to invest in stressed assets through asset reconstruction companies (ARCs), should directly participate in the bad loan market within an annual limit set by the apex bank in consultation with the government.

The regulations issued by various regulators should be amended to allow participation of non-banking entities such as mutual funds, insurance companies, and pension funds, the task force said.

There should be a central loan contract registry, it said.

“An active secondary market for corporate loans may result in a productive and optimal deployment of capital by banks, which will have a consequential positive impact from a fiscal perspective for the government,” it said.

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