A secondary market for corporate loans amid a credit crunch in the economy is a logical way forward. The recent RBI Committee report in this regard suggests creating an online marketplace where banks can sell their loans to a wider set of investors from mutual funds, insurance firms to foreign investors. The idea already exists in its limited form in selling stressed loans to ARCs.
The report talks about evolving it to an organised structure where not only stressed but also secured loans can be traded.
Although a secondary market can help banks utilise their capital better and reduce exposure in overstretched sectors, only investors with strong capital base and risk appetite can buy large loans from banks. Besides, there are concerns of banks disbursing loans without quality due diligence (knowing they can sell it off later). Any default or delay in interest payments could be catastrophic as funds and a few institutional investors pool the savings of small investors. A good start could be having a credit market for midsize loans first.