Although loan trading is known as the most sophisticated credit product and has many advantages, it is also true that this product may not perform equally well in all markets. It performs well in mature and efficient markets. Nevertheless, Bangladesh Bank may consider introducing this product in a limited scale for the purpose of diversifying the country's credit market and making it more efficient.
ENACTMENT OF LOAN SYNDICATION AND TRADING ACT: As a first step towards introducing loan trading, a separate law governing the operation of loan syndication and trading has to be enacted. This law must be made comprehensive covering all areas of loan operations. It may be mentioned here that loan trading mostly applies to syndicated loans, although bilateral loans can also be traded but its practice is limited. Therefore, loan trading Act should equally focus on syndicated loans. This law should also specify who will become the members of loan trading association and what will be their eligibility. Formation of loan trading association, its bylaws, roles and responsibilities will be governed by this law. Even, core operational issues including settlement criteria, settlement period, handling of delayed settlement, consequences of settlement failure etc., should also be clearly spelt out. If possible, qualification, role, responsibility, accountability of traders who will trade loan should be clearly mentioned in order to avoid ambiguity. Further, this law should also cover the process of developing loan trading platform. In addition, some sections of other relevant laws viz., Bank Company's Act, Contact Act, and relevant Bangladesh Bank regulations may have to be amended in order to avoid any conflicting sections.
FORMATION OF LOAN TRADING ASSOCIATION: Secondary loan trading cannot be made an open platform so that any lender can join at any time. Minimum common standard, ethics, commitment must be practised among the parties involved in loan trading. This can only be ensured through formation of loan trading association where all lenders who intend to buy and sell loan will become members. This association will develop its own bylaws in the light of loan trading act. Usually, banks and financial institutions become members of loan trading association. However, other non-bank financial institutions can also be given the opportunity to become members. This opportunity can further be extended beyond conventional lenders by accepting other companies and even non-governmental organisations (NGOs) who are in possession of idle fund. It is true that loan trading opportunity can be more beneficial for non-bank organisations including NGOs because these entities do not have direct access to credit market. These entities in spite of possessing enormous investable fund cannot usually lend money to probable borrowers. If allowed, they will be able to invest in the country's credit market.
ESTABLISHING WEB-BASED/ONLINE TRADING PLATFORM: Loan trading is conducted through online trading system, so a comprehensive and user-friendly online trading platform is required to be developed as a primary measure of launching this product in the market. Now a days, many web-based applications are efficiently used in banking operations. So, this online trading platform can also be developed using internet facility. Purchase of this software will of course be very expensive, however, measures can be taken for in-house development with the help of IT experts providing them professional expertise and appropriate business guidelines. This online platform must have access to only the authorised persons of active members of Loan Trading Association and will be completely restricted for outsiders. At the same time, all member banks and financial institutions must maintain adequate and efficient back office which will be responsible for settlement and other ancillary works associated with the executed trades. Even, Loan Trading Association will have to play greater role and act as SRO (Self-Regulatory Organisation) with stringent oversight on the entire trading process. Otherwise, it will be difficult to make it compliant and keep this product out of market manipulation.
SIMPLIFYING LOAN DOCUMENTATION: Complicated and complex loan documentation is one of the major barriers in diversifying our credit market. Loan documentation procedures inherited from conventional banking system is still applied in securing credit facility. This procedure and collection of legal documents are too complex and cumbersome. Even there is no uniformity in documentation procedures as requirement varies from bank to bank, and even from loan to loan and borrower to borrower within the same bank. DP (Demand Promissory Note), Letter of Revival, Letter of Continuity, Letter of Agreement, Sanction Advice, Deed of Agreement, Personal Guarantee, Letter of Pledge, Registered Mortgage, Equitable mortgage, Power of Attorney are among the scores of documents required for sanctioning any loan. This process can easily be made very simple through execution of only one document that may be called comprehensive Credit Agreement among all the stakeholders, particularly borrower, lending bank, agent bank, if any, and making this document mandatory for all parties involved. Any issue or dispute over the approved credit will be resolved in the light of the terms and conditions as agreed upon and stipulated in the said credit agreement. It is mentionable that banking industry of the developed world and many developing countries follows this practice. Without simplifying loan documentation process, launching of loan trading will not be appropriate as managing of this product will become chaotic.
MODERNISING LOAN OPERATION & IMPROVING NPL SITUATION: Loan trading is a very modern banking product while our loan operation is still in a traditional system, so these two approaches are unmatchable and therefore, to be successful in loan trading, there should be steps for qualitative change in loan operations. Automation and centralisation are primary measures to initiate standardisation of bank's loan operation. Uniformity has to be established in loan rating and automated approval process across the industry. In our country, interest accrued on outstanding loan is mostly accounted for and debited / added with loan balance in order to take that into bank's income. This is not a standard practice at all and with this sub-standard practice, loan trading product cannot be made successful. Similarly, the main problem of our banking industry is huge NPL that needs to be streamlined. To speak the truth, our NPL situation has reached such an alarming state that no diversification move can be undertaken without resolving this long-standing problem.
LOAN TRADING IS NO SOLUTION FOR NPL: We have to keep in mind that loan trading does not help banks resolve NPL problem because the status of a loan does not change through trading. Loan status remains the same regardless how many times it is traded. As per standard practice, there is no scope of changing the status of loan which means, substandard loan will remain substandard even after changing the lender party. Besides, loan is listed in the trading platform with its historical background and thereafter, every action taken or attempted on the listed loan is electronically recorded. Once, the loan is recorded, its history can neither be erased nor tempered. However, regular evaluation and any change of loan's status if necessitated for the cause of loan itself will be carried out at its originating level i.e., the bank from where the borrower borrows and this change is accordingly updated in the trading platform. But there is no scope of changing the status of loan through trading only.
Thus introduction of loan trading will require detailed analysis and thorough study about the product. Enactment of law and amendment of some existing laws must be in place prior to introducing it in our banking industry. It is mentionable that if this product is launched without taking all precautionary measures and regulatory control, it may backfire causing another debacle in the banking sector.
Nironjan Roy is a banker based in Toronto, Canada.
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