India has a government debt to GDP ratio of 66%.
Bank finance should not be stifled in the pursuit of developing the bond market, feels R Gandhi, deputy governor of the Reserve Bank of India (RBI).
He cautioned against deepening the bond market at the cost of bank finance saying, "We must be realistic" while developing the bond market.
India has a government debt to GDP ratio of 66%.
He said often high government borrowing also crowds out private corporate bonds.
India's bond market is estimated to be about $1.1 trillion, and unlike the US, where the corporate debt market is bigger than the government debt market, India and China have bigger sovereign debt segment with sovereign debt to corporate debt ratio at 2:7 and 2:1, respectively.
"When we talk of developing a corporate bond market we must be realistic about our goals. More importantly, we must not be blinkered in squeezing bank finance to forcibly take up the corporate bond market," Gandhi said at a seminar on Challenges in Developing the Bond Market in BRICS, jointly organised by the finance ministry and Confederation of Indian Industry.
"We would do well and act wisely if we keep our efforts in this direction," he said.
He said more than 85% of the corporate bond issuance is undertaken by high rated (A and above) issuer. "Our attention to credit enhancement mechanisms would go some way in channelling demand from entities such as insurance and pension funds, which need to protect their credit exposure. But what is also required is to create conditions to attract new investors into the market. Retail investors could absorb the credit risk through wider dissipation. We might also have to look at less risk averse external investors."
With the rise in urban population, India's infrastructure has failed to keep pace with urbanisation and the situation is ripe for municipal corporations to look beyond conventional sources of funding (like grants, tax, etc).
"Municipal bonds can be explored as an option for infrastructure financing by addressing the various supply and demand side constraints," he said.
He said both the RBI and the government is looking at implementing the Khan committee recommendations such as enhancing the credit supply of the large borrowers through the bond market beyond a certain threshold rather than depending on bank finance and allowing banks to provide partial credit enhancement of 50% of the bond issue size and single bank exposure not exceeding 20% of the bond size.
Calling for transparency in the bond market, Gandhi said that primary issuance of corporate bonds is dominated by private placements.
"More than 95% of total issues are privately placed. This is not, per se, a shortcoming as long as there is transparency regarding such issues," according to him.
"As long as information about such issues and their life-cycle performance (particularly default history) is publicly available, investors should be able to take informed decisions. "What is required here is a public database that is freely accessible. Effort of authorities has been towards building a trade repository of both primary and secondary activities," he said.
India' corporate bond market is dominated by financial institutions accounting for 74% of all primary issuances in fiscal 2015. Non-financial corporates account only for 19% of all outstanding issuance. Clearly, access of non-financial corporates is limited and needs to be encouraged, he said. "It is in this context that the RBI's recent announcement to push large borrowers to the bond market assumes significance," he said.
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