Corporate bonds issuances to benefit from RBI’s proposed norms: India Ratings

MUMBAI: The Reserve Bank of India’s (RBI) discussion paper on prudential norms for banks’ investment book, if implemented, is expected bring structural changes by allowing corporate bonds to qualify for the held to maturity (HTM) book, India Ratings and Research said.

The proposed inclusion of corporate bonds will catalyse banks’ investment in corporate bonds, especially long-term bonds, it said.

The rating agency believes there will be some key challenges in case of allowing corporate bonds in HTM. Firstly, HTM provides exclusion from regular mark to market; therefore, in the case of worsening credit quality, notional losses may go up disproportionately.

As per the discussion paper, an impairment test will be required to be conducted on a quarterly basis and if any impairment is found, it shall be debited to the profit and loss (P&L) account. India Ratings said to avoid such a phenomenon, certain rating restrictions through a minimum rating threshold limit are required to trigger mark to market, and subsequent alignment with market-based pricing.

Secondly, HTM in corporate bonds will reduce the stock of corporate bonds for trading, therefore impinging market liquidity, it said.

“Globally, the corporate bond market plays a key role in the financial system; a vibrant corporate bond market ensures better credit underwriting and efficient market mechanisms. Although market-based funding is more susceptible to vagaries in the capital market, it does not surpass the benefits of a developed bond market,” it said.

According to the rating agency, with changes in the conventional lending landscape due to fintech revolution, borrowers and investors are scouting for more financing options in the capital market. In such an environment, boosting banks’ impetus for corporate bonds is a welcome move, it added.

Existing Indian norms allow only the securities issued by the central government, state governments and some infrastructure companies to be held in the HTM category, up to of 25% of the total investments. The new norms, however, propose to include corporate bonds along with existing securities that are allowed within the HTM category along with removal of the 25% limit for this category. India Ratings said it expects this will boost banks’ impetus in investing in corporate bonds. Investors among corporates are largely concentrated on insurance and pension funds, followed by mutual funds.