The secondary debt market is growing to be a large market. The borrowers when do not pay their bills and become delinquent customers, the debts are usually sold to another company. The creditor company thus makes money by selling their debt as a commodity in the market.
The secondary debt market plays as a platform to the creditor companies that have lost hope to recover their money from their defaulter debtors. The credit companies then sell the debts to another agency. In a typical secondary debt market, the debts may be sold and bought various times.
Also Explore: Secondary Market
The agency then calls the borrower to pay back the borrowed money. Most of the times the agency agrees to go for a settlement agreement with the borrowers. There are special secondary debt agencies that offer secondary debt investment options. The secondary debt investment is complicated and complex in nature.
The secondary debt market has been experiencing a booming growth. The main reason behind it is that the borrowers gain the upper hand in the primary debt market. But the growth of secondary market for debt may give rise to a number of problems.
When the refinancing of bank debt is sought, the finance directors are the most important entity in the borrowers’ market. The finance directors are the persons who are required to keep a close watch on what the banking syndicates are offering.
The secondary debt market needs to evolve continuously. Here are some reforms mentioned that should be implemented on the current secondary market. The reforms are divided into three major areas, which are
- Market related reforms
- Settlement system reforms
- Measures to diversify the investor base
As suggested by the reforms, there should be transparency into the interbank terms and relations. There should be a centralized database regarding the non-government bonds in order to increase the accessibility of secondary market to all. The reform also suggests encouraging the growth of market intermediaries. A definite time frame should also be set up for the introduction of interest rate derivatives in the secondary market.