India’s corporate bond market has posted a significant growth between March 2016 and 2018, according to CRISIL Year Book on Indian Debt Market 2018. The corporate bond outstanding has increased approximately 1.36 times during this period. The growth story is expected to continue over the next five fiscals through 2023, and its outstanding is expected to grow to the tune of Rs55-60 lakh crore, as compared to the present Rs27 lakh crore (as on March 2018).
The report said the growth in the last two years was mainly driven by large infrastructure investment requirements, growth of non-banking financial institutions, regulatory push, and the inability of banks to crank up corporate lending because of capital constraints.
Sebi had appointed a committee headed by former RBI Deputy Governor HR Khan on August 2016 to look into it.
The demand, however, is expected to be only for approximately Rs52-56 lakh crore, driven by higher penetration of mutual funds and insurance products, increasing retirement subscriptions, growth in corporate investments and increasing wealth of high networth individuals. As a result, there would be a significant demand and supply gap of roughly Rs3-4 lakh crore in this span. Bhushan Kedar, Director, Funds & Fixed Income Research, CRISIL, said, “A slew of measures are required to bridge this gap.”
Ashu Suyash, MD and CEO, CRISIL said, “We need a big step in investor awareness, better coordination across the ecosystem, a continuation of regulatory reforms and an introduction of new instruments and hedging mechanisms.” While stabilisation of the process and quicker resolutions under the Insolvency and Bankruptcy Code would increase investor confidence, any measure to improve market liquidity will provide a significant leg up.
Even after doubling the size of the corporate bond market, its total size will rise to just 20 per cent of the total GDP from the current level of 16 per cent, which would still be way shorter than developed countries and some Asian peers, CRISIL said.
Kedar said, to achieve the desired growth, the policy makers, market participants and intermediaries need to focus on certain factors. First, building a stronger market infrastructure to create depth and risk mitigation mechanism for credit and liquidity. Second, ensuring higher retail participation both in direct and indirect forms. Third, smooth implementation of regulatory reforms.
These initiatives span across jurisdictions of different regulators and hence inter-regulatory coordination holds the key, he added.
Structurally, the Indian debt market, on one hand, remains firmly skewed towards Government securities. On the other, the corporate bond market remains largely about top-rated financial and public sector issuances. Additionally, deepening the market for A rating category, bonds will allow a large number of companies to tap the market at lower interest rates as compared to bank loans, CRISIL said.
Finance minister Arun Jaitley during this year’s budget urged regulators to facilitate deepening of the market by reducing its skew towards AA and above rating categories.
CRISIL’s analysis shows that there are 2,400 companies rated in that category with aggregate long-term bank facilities of Rs10 lakh crore. For long-term investors, bonds from such entities offer opportunities to diversify their portfolios and improve returns without increasing the risk.
A number of steps need to be taken to ensure healthy demand-supply dynamics. While the reforms done so far have been progressive, we need more of it, and then some fine tuning. Both facilitations and market infrastructure need to be apace, for the stakes are very high, CRISIL said.