If ever a census is conducted on the one subject eliciting the largest number of committee reports, the Indian corporate bond market will win hands down. This is a long and respected tradition: the government, various agencies, regulators and research organizations, including Indian Institutes of Management, have all commissioned a report on how to develop a vibrant corporate bond market at some time.

Every time there is a credit squeeze, or the economy enters a phase of rapidly rising interest rates, high decibel levels from borrowers (especially organized industry) impel some agency to commission yet another report on how to activate a corporate bond market. Panels are formed, meetings held, familiar ground revisited, recommendations framed, and then the report is ritually entombed in a vault in which many similar reports lie awaiting salvation.

Here are some examples: High Level Expert Committee On Corporate Bonds And Securitization (R. H. Patil Committee, 2005), High Powered Expert Committee On Making Mumbai An International Financial Centre (Percy Mistry Committee, 2007), A Hundred Small Steps (Raghuram Rajan Committee, 2009), New Thinking On Corporate Bond Market In India (Union finance ministry, 2011), and Working Group On Development Of Bond Market In India (Harun Rashid Khan committee). There have also been reports from overseas. Apart from a report from the City of London, multilateral agencies such as the World Bank and Asian Development Bank have also contributed to the literature.

Yet, much like the Scarlet Pimpernel, a workable corporate bond market eludes us.

Similarly, for many years, discussions have waxed and waned about creating a credit or loan market that will enable banks to trade loans, create liquidity and re-optimize capital. In keeping with our well-established tradition, the Reserve Bank of India (RBI) in its April 2019 bi-monthly monetary policy announced the constitution of a task force for developing a secondary market in corporate loans.

RBI’s accompanying statement said: “The secondary market for loans can be an important mechanism for credit intermediaries to manage credit risk and liquidity risk on their balance-sheets, especially for distressed assets. Loan sales can facilitate risk transfer across intermediaries that originate credit (such as banks and non-banking financial companies) as well as from credit originators to intermediaries such as Asset Restructuring Companies (ARCs), Private Equity (PE) funds, Alternative Investment Funds (AIFs), etc. Presently, the secondary market for corporate loans in India is dominated by transactions of banks in non-performing assets and is constrained by sparse information on pricing and recovery rates."

The task force has now submitted its report and it makes for interesting reading. Technically, a loan market is a good idea and might, at a stretch, even be attainable. Given that a vibrant and deep corporate bond market continues to remain illusory, a credit market might be the right way to sequence the creation of a robust corporate bond market.

This becomes even more relevant in view of the recent disclosures that mutual funds, pension funds, insurance companies and PE funds have all originated contaminated assets. These disclosures have hurt market sentiment. The extent of the damage is still unknown; plus, there is no telling what other assets on the books might sour in future. All these institutions had turned aggressive credit purveyors in the recent past, despite lacking credit appraisal and pricing capacity, or a rigorous risk mitigation and asset recovery mechanism.

A loan market might be able to bridge some of these gaps. While a loan market helps banks churn their books, buyers—members of any of the financial services mentioned above—will have the comfort of a competent agency already conducting the preliminary credit appraisal. Their responsibility, in conjunction with the credit rating agencies, will then be in monitoring the loan.

But a cautionary note must be sounded here. Multiple factors that stopped bond markets from taking off might also impede the development of a loan market.

According to a January 2019 paper, (bit.ly/2k7a0LU) authored by Shromona Ganguly, a research officer at RBI, a number of structural and regulatory factors have hindered the development of a corporate bond market, including issues relating to the market’s micro-structure.

For example, infrastructure and financial services companies dominate issuance with a negligible presence of manufacturing companies. There is a preponderance of AAA-rated bonds in the market with very little risk appetite for lower rated debt. Also, 98% of the amount raised is through private placements, with opaque coupon pricing restricting the securities’ liquidity. The bond market is also crippled by varying stamp duty levels in different states.

The loan market will also need multiple systemic changes to be effective and RBI might like to examine the regulatory changes required. As a first step, RBI should steer the formation of a self-regulatory organization for creating the ground rules and documentation. A technical tie-up with the Asia-Pacific Loan Market Association should also be considered, given that it already has an India chapter. These are easy steps. It’s the tougher calls—such as the stamp duty issue or disciplining errant borrowers—that will test RBI’s resolve.

Rajrishi Singhal is consulting editor of Mint. His Twitter handle is @rajrishisinghal

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