What the industry and observers have been saying that there is a lot of regulatory confusion on developing a corporate debt market came out in the open on Monday, with the RBI Governor and the Plan panel chiefs taking divergent views on the issue.
Reserve Bank Governor Duvvuri Subbarao questioned the feasibility and the ability of both the government and banking system to meet the ambitious $1 trillion infrastructure investment for the next five years (2012-17).
Subbarao along with Planning Commission Deputy Chairman Montek Singh Ahluwalia was attending the foundation day of the Indira Gandhi Institute of Development Research, chaired by the RBI Governor here yesterday.
Montek Singh Ahluwalia said a corporate debt market could take the burden off by pitching to meet the $500-billion funding gap in this regard.
However, Subbarao-- who also disagreed with the finance ministry and the Planning Commission on inflation management and fiscal deficit cuts--said, "corporate bond market looks more like an impressionist view and not exactly based on proven facts. We need to really study the issue before going ahead with (it)."
Ahluwalia, in his address on the Challenges in the 12th Plan, has underlined the imperatives for pumping $1 trillion into infrastructure such as highways, roads, ports and airports among others, so that the country could achieve the 9% growth trajectory over the next five years.
During his interaction with reporters, the deputy chairman of Planning Commission stressed that corporate debt market was the way out as the government and the banking system could meet only up to 50% of the funding requirement.
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"With the current level of capital account deficit and slowing FDI and high fiscal deficit, we cannot expect the government to fund the entire $1 trillion. Nor can banks take up this challenge head on. Therefore, only a corporate bond market can help chip in with the funding gap," Ahluwalia said.
These comments come on the heels of the Centre recently commissioning Ernst & Young India to draw up a road map on the corporate debt market. The E&Y study is being funded by the World Bank and will be submitted within the next six months.
Yesterday's development comes within a month of deputy governor Subir Gokarn allaying doubts about any regulatory confusion on the issue.
Gokarn said that corporate debt market development was a complicated process as it involved regulators and the finance ministry, but all were earnestly involved in the process and were working in tandem.
The RBI Governor yesterday pointed out that in the current budget, only under $150 billion is allocated to capital investments and it will not be easy for the government to scale this up to fund infrastructure. "Our regulation governing infrastructure finance is among the most accommodative in emerging markets," Subbarao said.
Bank lending to infrastructure is already stretched and more loans to the same sector might affect financial stability of the banks as their long-term nature would leave banks with huge asset-liability mismatches, he added.
"If the bank's non-food credit goes up to 15% from the current 13.1%, it can meet only $250 billion... but banks are already overstretched.
Along with plan allocation of under $100 billion and another $150 billion from the government will still leave us with a $500 billion gap. From where are we going to find this money?" the RBI Governor said.
Today RBI regulations allow a bank to fund up to 50% of an infra project developed by a single entity, while the bank funding is only 40% if the the project is developed by a consortium, Subbarao said.
As per a Boston Consultancy forecast, domestic market can grow four fold from about $400 billion in 2006 to about $1.8 trillion, or 55% of GDP, by 2016. Within this, non-government segment can grow six fold from $100 billion in 2006 to $575 billion in 2016.
In the absence of a developed retail bond market, corporates do not have any incentive to raise capital, though this mode of fund raising is cheaper than bank funds.
As per an ADB report, government bond market at around 40% of GDP, stands ahead of the most emerging East Asian markets while corporate bonds account for just about 4% of the GDP.
In absolute terms, total outstanding volume of government bonds stood at $364 billion at the end of 2008, slightly behind China and Korea.
Banks dominate the domestic bond market with over 85% of total bonds/paper issued being dominated by government securities/bonds. Moreover, there is little retail participation as banks under the statutory liquidity ratio management are mandated to buy these government papers.
Currently, as much as 80% of infra funding is met by banks, which is not sustainable in the long-run. Going by the long gestation period of infra projects, bank funding to the sector can lead to asset-liability mismatch of banks.
Also, up to 50% of the household savings, which stand at over 34% of the GDP now, go to banking and financial sector as there is no viable options left to them. Experts believe that if corporate bond trading picks, some of this money could go into this.