Mumbai: A month after the Reserve Bank of India (RBI) floated a draft regulation that seeks to push corporates towards the bond market and away from banks, a deputy governor warned that goals to develop the corporate bond market should be “realistic".
“We must not be blinkered in squeezing bank finance to forcibly take up corporate bond market. We would do well and act wisely if we keep our efforts in this direction," said RBI deputy governor R. Gandhi in a speech on Tuesday at an event in Mumbai on developing corporate bond markets in BRICS economies, organized by the finance ministry and the Confederation of Indian Industry.
In August, RBI had announced a slew of measures that ring-fenced the banking sector from leveraged companies and pushed them towards the bond market. Starting next fiscal year, banks will have to set aside higher provisions for incremental lending to borrowers who have a certain amount in outstanding loans. The central bank also floated a draft regulation wherein a bank’s exposure to a single company and a group would be brought down over time.
The measures came after a panel chaired by former deputy governor H.R. Khan submitted its recommendations of measures needed to develop and deepen the domestic corporate bond market. RBI has adopted most measures that required its nod.
Gandhi noted that even in developed economies, corporate bond markets are not as developed and as liquid as the government securities market.
“It is not uncommon in advanced economies that for corporates, the timely source of funds is not the corporate bond market but the credit market," he said.
He noted that many countries such as Germany and UK follow a bank-led model for financing their economy’s needs.
Listing out the remaining challenges, Gandhi said efforts should be to enable more and more lower-rated companies to access the bond market as well as create a wide investor base to distribute risks evenly.
Gandhi said only 14% of the investments in the domestic corporate bond market are in BBB or lower rated paper; the AAA- and above paper has a 80% share. Stating that it is “unrealistic" to expect the secondary market in corporate bonds to be as liquid as government bonds, he said there is a need to deepen the activity.
“Thin secondary market activity not only affects transparency, it also makes the process of price discovery suspect," he added.
At the same event, Securities and Exchange Board of India chairman U.K. Sinha said that the regulator will help set up an information repository for the primary issuance market of corporate bonds.
“Tax on bond gains is an issue that needs to have a relook," he said, adding that the issue of stamp duty could be resolved once the goods and services tax is in place.
Indian firms have been turning to borrow from the bond market lured by yields far lower than bank lending rates. Over the past three years, corporate bond issuances have surged, totalling over Rs4 trillion in fiscal 2016, but most have been privately placed and there is little trading.