'Vibrant secondary market, liquidity to help develop bonds'

A vibrant secondary market and higher liquidity will help in development of the corporate bond market and drive economic growth, a Sebi official said.
"The development of the bond market is linked to the development of an economy as it allows efficient flow of capital from the savings area to where it is needed," Sebi Whole-time Member G Mahalingam said at an event organised by industry body Assocham here.
Traditionally in India, government securities had been treated as the only high quality liquid assets. Over time, corporate bonds will also be considered as high quality liquid assets and the government is slowly yielding its place in favour of bonds, he added.

Mahalingam felt that people recognising the importance of such instruments is contingent on vibrancy of the secondary market for bonds.
"Corporate bond market is going to be very robust if bonds markets can provide the kind of liquidity given by bank deposits," he said. Besides, weaning companies away from bank loans will facilitate in development of the bond market, he added.
Both RBI and Sebi, according to the Sebi official, have put in place several measures in the last 3-5 years, which will actually lend greater attractiveness to bonds, particularly to the secondary market trading in such tools.

Speaking at the event, Crisil Associate Director Bhushan Kedar said Indian bond market has not grown the way it should have due to structural constraints -- dominance of banks in lending, risk appetite of investors limited to higher ratings, regulatory arbitrage between loans and bonds and prescriptive regulatory limits on investments.

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Talking about the initiatives taken by the government with a view to boosting corporate bond markets in India, Mahalingam said the insolvency regime is finally in place.
Further he said the government's borrowing budget in the current year has come down by almost Rs 2 lakh crore, which is going to be a great enabler for corporate bonds to come into the picture.
"There is a Rs 2 lakh crore space which is left vacant, which has to be absorbed possibly by corporate bonds, some of it is already coming in the form of commercial paper. Certificate of deposits is coming down obviously for the reason that banks are no longer in need of deposits which have poured into the banks ever since November 9."

"Given that background, the government is actually vacating space, there is a huge amount of space which is developing so automatically that the corporate bond scenario is going to grow in a very robust way," he added.
According to Mahalingam, most people do not realise that bond markets are growing. "One stark fact now is that bond market growth this year has out-stripped the bank credit growth, which is surprising, it has never possibly happened in the past at all," he said.
Bank deposit growth this year is almost close to 10 per cent, which totalled Rs 105 lakh crore, Mahalingam added.

Bank credit has grown an abysmal 4.8 per cent this year, which is at around Rs 73 lakh crore. "If you look at the bond market correspondingly, it has really grown by leaps and bounds," he added.
Mahalingam said infusing some amount of secondary market liquidity can help attract retail investors enter the corporate bond space.
"As retail investor, when I get into bonds, I also think of liquidity. When I put money in banks' fixed deposits, it is not merely for the interest rate that I get, but also for the liquidity it gives me, which gives me a tremendous amount of comfort in addition to the return. Though the return is much less, I am satisfied because liquidity is there," he explained.

"If same were to be the case with the bonds, I am sure it is going to be an important, tempting factor for the retail investor to come into the bonds space and that is where perhaps some amount of secondary market liquidity is needed."
Sebi's Whole Time Member also suggested that people should be allowed to move around freely from one segment to another with free connectivity as that would create and open up the entire market in a robust manner.
"If we can open up this connectivity, if the banks can play a role in the exchange traded platform segment, we are going to have a bond market where perhaps the liquidity will go unchallenged and perhaps match the liquidity levels in the US," Mahalingam said.

He also said it must be seen whether regulators like Irdai (Insurance Regulatory and Development Authority of India) and PFRDA (Pension Fund Regulatory and Development Authority) have created that kind of a bandwidth for the insurance companies, pension and provident funds to invest in the bond market.