In the first step towards building a secondary loan market in India, 10 banks including State Bank of India (SBI) and ICICI Bank came together last week to set up the Secondary Loan Market Association (SLMA), where lenders will trade corporate loans. Mint explains how it will work.
In the first step towards building a secondary loan market in India, 10 banks including State Bank of India (SBI) and ICICI Bank came together last week to set up the Secondary Loan Market Association (SLMA), where lenders will trade corporate loans. Mint explains how it will work.
How will the SLMA operate?
The SLMA has been set up as a self-regulatory body following the recommendation of a Reserve Bank of India (RBI) task force on developing the secondary loan market. Apart from SBI and ICICI Bank, it includes Canara Bank, Standard Chartered Bank, Kotak Mahindra Bank, Deutsche Bank, Bank of Baroda, Punjab National Bank, Axis Bank and HDFC Bank. It will build an online system for the standardization and simplification of primary loan documentation, and standardization of the purchase and sale/assignment documentation and other trading mechanisms for the secondary loan market.
How will it benefit lenders?
The SLMA will help banks manage loan portfolios to comply with regulatory capital requirements. Banks can sell specific loans which could open up more lending opportunities. It also helps banks manage asset-liability mismatches, adhere to RBI’s large exposure framework and trim concentration risk. It also provides opportunities for small banks to participate in highly creditworthy lending exposures at the time of origination. In case of potentially stressed borrowers, the secondary market helps banks reduce the overall recovery cost as the lenders can go for an immediate realization of value even before a default.
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What is the current size of this market?
Bloomberg data shows that the volume of rupee syndicated loans stood at ₹0.94 trillion till July 2021, ₹2.18 trillion in 2020, and ₹1.68 trillion in 2019, which is expected to go up with the debut of the SLMA. RBI data shows 96,303 borrowers have an aggregate credit exposure of ₹5 crore and above, with 266 of them having an aggregate exposure of ₹5,000 crore or above.
How will it benefit companies?
The secondary market helps larger borrowers widen their lender base, avoiding funding uncertainties associated with having banking relationships with a few lenders. It also helps them gain better access to market participants with different risk appetites by multiple trenching of loans. The secondary market for corporate loans also helps the borrower by enabling a single point of contact for their borrowing needs and provides a mechanism to retire the existing loans and avail of funds/debt at a lower cost
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
Keeps money moving: Lenders can move certain loans off their books, while retaining other loans that they'd prefer to keep. It also allows them to use their capital efficiently, allowing them to generate fees for underwriting mortgages, sell the mortgage and then use their capital again to write a new loan.
The purpose of GSEs buying mortgage loans in the secondary marketplace is to ensure liquidity for mortgage originators. This liquidity allows for lenders to continue providing borrowers with access to the loans they are seeking.
In a nutshell, selling loans is more profitable than holding onto them. Banks can make money by writing a mortgage and then collecting the interest on it for years. But they can make even more by issuing a mortgage, selling it (and earning a commission), and then writing new mortgages, and then selling them.
The secondary mortgage market benefits homebuyers in many ways, including: Keeping mortgage rates lower. Enabling interest rates for mortgage loans to be similar across the country, in good times and bad. Making mortgage loans with longer terms, such as 15 and 30 years, available to borrowers.
The purpose of the secondary mortgage market is to provide liquidity (funds) for the primary market (institutional lenders). What happens when Fannie Mae purchases a mortgage? Fannie Mae executes a servicing agreement which allows the loan originator to be the collection agent and receive a fee.
The secondary market provides investors and traders with a place to trade securities after they are put up for sale on the primary market. Investors trade securities on the secondary market with one another rather than with the issuing entity.
Value Indication: Secondary market trading helps efficiently set the price of assets and the valuation of a company. In competitive market transactions, buyers and sellers trade at prices they find reasonable according to supply and demand conditions.
The answer is fairly straightforward. Lenders typically sell loans for two reasons. The first is to free up capital that can be used to make loans to other borrowers. The other is to generate cash by selling the loan to another bank while retaining the right to service the loan.
The main reason is to allow lenders to afford to lend money to new home buyers. It's common practice to sell mortgages so that lenders can get more money to help finance additional mortgages. The process is cyclical and continues from there.
Many lenders specialize in originating a mortgage, but often, this initial lender can't afford to wait for 15 or 30 years for you to pay it all back. By selling it, they no longer have to keep your debt on their books, and they can offer loans to other prospective homeowners.
The primary advantage of the secondary market is liquidity. Liquidity ensures investors can buy and sell these securities easily without significantly impacting their prices. Other advantages are as follows: It provides a platform for investors to buy and sell securities.
Why are secondary markets important? Secondary markets are important because they provide liquidity to investors. Buying and selling securities quickly often reduces the amount of value lost on a trade. These markets also allow smaller investors to get involved with trading securities.
By packaging mortgages into MBS and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing.
Moreover, secondary markets create additional economic value by allowing more beneficial transactions to occur and create a fair value of an asset. Secondary markets also provide liquidity to the economy as sellers can sell quickly and easily due to a large number of buyers in the market.
By selling the loans they originate, lenders obtain funds that they can use to make new mortgages. Investors who buy mortgage loans after they have been closed by primary mortgage lenders usually consider the loans as investments, and usually pay the lender a fee to continue servicing the loans.
Ans: The secondary markets provide liquidity to investors after their initial purchase of the security. This liquidity encourages them to purchase the security at the initial offer.
Introduction: My name is Kareem Mueller DO, I am a vivacious, super, thoughtful, excited, handsome, beautiful, combative person who loves writing and wants to share my knowledge and understanding with you.
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