Centre set to deepen bond market with special focus on infrastructure, housing2 min read . Updated: 24 Aug 2019, 12:32 AM IST
- The Credit Guarantee Enhancement Corp will now be available for infrastructure and housing projects to enable debt flow
- The government will work with the RBI and Sebi to enable stock exchanges to allow AA-rated bonds as collateral
In the Union budget in July, the government had announced the setting up of a Credit Guarantee Enhancement Corporation in fiscal year 2020. On Friday, Sitharaman said this facility will be available for infrastructure and housing projects, and will boost debt flow to such projects.
Currently, the government runs a Credit Guarantee Fund Scheme for micro and small enterprises to make available collateral-free credit to small companies. A trust under the scheme was set up in association with the Small Industries Development Bank of India (Sidbi) and guarantees loans up to ₹1 crore. Guarantees offered by the trust allow small and medium enterprises to borrow at cheaper rates.
Further, Sitharaman said that the government will soon take further action on the development of credit default swap market in consultation with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi).
The finance minister had assured in the budget that an action plan will be worked out to develop corporate bond repos and credit default swaps with specific focus on infrastructure.
The budget also had other announcements, including measures to deepen corporate tri-party repo market in corporate debt securities. Sitharaman had said that the Centre will work with the banking and capital market regulators to enable stock exchanges to allow AA-rated bonds as collateral.
The tripartite repo market provides opportunity to borrow against securities and provides short-term liquidity to participants. Typically, a repo transaction happens between two entities, wherein the borrower raises funds by selling securities with the promise to repurchase the securities on a specified date at a mutually agreed price.
The introduction of a tri-party repo was part of the recommendations of the H.R. Khan committee’s report on the development of the corporate bond market.
Last year, the National Stock Exchange and BSE had launched an electronic platform for repos. However, the securities allowed included only AAA category bonds, A+ rated commercial papers and certificates of deposits.
The central bank had introduced repos in corporate bonds in 2010, but the response had been lukewarm because of non-availability of guaranteed settlement and an electronic dealing platform.
These measures come at a time when RBI and Sebi have come out with a framework that forces corporates to bring down their reliance on banks by tapping the bond market for their financing needs. Starting this fiscal year, large corporates have to raise 25% of their incremental borrowings through bond issuances.
According to the Securities and Exchange Board of India, a large corporation is one which has an outstanding long-term borrowing of at least ₹100 crore.
The Reserve Bank of India considers a company large if it has an aggregate sanctioned credit limit of ₹25,000 crore from the banking system in FY18. The amount is progressively reduced to ₹15,000 crore in calendar year 2019 and ₹10,000 crore from calendar year 2020.