Fire Up the Bond Market

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 Fire Up the Bond Market

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  • Three key current market conditions: The corporate bonds market in India has witnessed (a) A steep decline in bond yields, (b) widening rate gap in bank lending, and (c) increased issuance of corporate bonds. 
  • Three compelling potential outcomes of corporate bond market reforms: Improved finance and better allocation of resources, market-determined term structure of interest rates, and higher transparency of bond financing as compared to bank financing for big long-term projects.
  • Reforms in government securities market: Government-security market became market-driven when auction method for government came into effect in 1992. NBFCs and primary players with high credit rating were allowed to be market-makers in government securities in 1996, and electronic trading was introduced.
  • No vibrant corporate bond market: Little progress has taken place in corporate-bond market reforms. 2005’s R.H. Patil committee recommendations have still not been implemented. Rationalization of stamp duty happened just last month. 
  • Corporate bond market reforms that have been implemented: Foreign portfolio investment (FPI) has been liberalized, banks can participate in offshore rupee market. Interest rate futures were introduced in 2003.
  • Limitations: Credit default swaps (CDS) are capital-intensive, given the vagueness surrounding netting of market-to-market (MTM) positions against the same counter-party. Banks have to provide higher capital charge on a gross basis.
  • Suggested measures:
    1. Policy coordination between Sebi, RBI, and GoI is required to implement debt market reforms. Huge private placement of debt securities merely held to maturity prevents the development of a healthy market for corporate bonds.
    2. Bond yields are low currently, ideal time to increase liquidity in the corporate bond market that can lead to more transparent financing of infrastructure projects and pull investment from pension funds and other long-term investors. 
    3. Effective management of credit risks is needed. One way to do it is through increased liquidity in CDS trade. Second is through credit guarantees on bond payments of greenfield infrastructural projects. Credit Guarantee Enhancement Corporation (CGEC) announced in the 2019 budget should work to draw in long-term investments from pension funds and insurance companies. It can free up about INR 3.5 lakh in bank funding.
    4. RBI should increase the use of corporate bonds for liquidity management. 
  • Summary: Indian corporates need a vibrant and deep market, where private placement is not a compulsion. Government action to enable this will help banks too.
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                                                                                                                                                                PT's IAS Academy: Fire Up the Bond Market
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                                                                                                                                                                Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
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