Low penetration and regulatory push augur well for India's debt capital markets: ICRA

India's debt capital markets have grown significantly during the last few years as reflected in the increase in total debt outstanding (sovereign + private sector) to Rs. 106.88 lakh crore as on December 31, 2016 from Rs 45.31 lakh crore as on March 31, 2011 (CAGR of 15 percent during the period).

The amount of corporate debt (including financial sector) has also increased at a steady rate, at a CAGR of 12 percent during the above period growing from Rs 14.2 lakh crore as on March 31, 2011 to Rs 27.9 lakh crore as on December 31, 2016.

"Though the quantum of corporate debt outstanding has doubled, the penetration of the corporate debt market remains low in relation to GDP growth. The corporate debt/GDP has increased by only two percent during these six years; that is, from 17.5 percent of GDP in FY 2011 to 19.5 percent in 9MFY2017." This ratio is significantly lower than in other countries, like China (48 percent) or other smaller economies like Brazil (39 percent), Thailand (48 percent), Malaysia (46 percent) and Singapore (48 percent), reflecting the scope for considerable improvement of issuer and investor participation in the debt markets," said MD and Group CEO ICRA, Naresh Takkar.

 

The share of capital market borrowings in relation to total bank borrowings has improved from 19 percent in FY 2011 to 27 percent in 9MFY2017.

Notwithstanding, the increased participation from issuers, the broader participation remains subdued with high concentration of debt issuances from few top issuers. The top-10 issuers have consistently accounted for ~50 percent of the total value of issuances, as investors remained inclined towards higher rated borrowers. Of the total value of debt issuances, ~90 percent are from issuers with credit rating of AA- or higher. Similarly, almost 99 percent of the value of commercial paper issuances is from issuers rated A1+; reflecting limited investor's appetite for lower rated papers.

During September 2015, Reserve Bank of India (RBI) had allowed banks to offer partial credit enhancement to corporate bonds and project SPVs.

Subsequently, in August 2016, RBI has issued guidelines on "Enhancing Credit Supply to Large Borrowers through Market Mechanism" and "Large Exposure Framework."

As per ICRA's estimates, taking into account a 10 percent annual credit growth in borrowings of these large issuers, it can result in potential additional debt issuances of Rs. 70,000 crore per annum. "The above regulatory developments are significantly positive for growth of debt capital markets, however with many large issuers, especially in the infrastructure and other capital intensive sectors rated in the lower rating categories; the initial capital market issuances will mainly be for refinancing of operational projects as the investors' appetite for project level entities is expected to remain limited. At the same time, measures towards strengthening the market infrastructure, improving the liquidity in secondary markets and introduction of new products will help make the Indian debt capital market more vibrant," added Takkar.