It was interesting to read the editorial “Budget and bond market” (February 8), which observed that allowing banks to offer guarantees for domestic debt issues “seems eminently sensible in theory”. The editorial blames government policies in the government securities market for the failure of the corporate bond market to pick up. These arguments seem naive.
When a corporate bond is supported by a bank guarantee, it effectively ceases to be a bond of the issuing company. The buyer takes exposure on the bank issuing the guarantee. How does this help the corporate bond market grow? Whether raising resources through a guaranteed bond would be cheap, especially when a bank loads its capital cost fully to the guarantee, adds another dimension.
Absence of a yield curve is not really an issue. A well-defined sovereign yield curve up to 10 years is available — even a yield curve up to 30 years is reasonably good. The issue is the credibility of our companies and their willingness to pay spreads over sovereign rates. Suggestions that insurance companies and provident funds be allowed to invest in lower-rated bonds or that AAA-rated corporate papers be treated as statutory liquidity ratio securities are equally naïve.
The corporate bond market is not growing owing to poor infrastructure. The unwillingness of companies to pay appropriate spreads is another important factor. Let us separate bonds of financially-strong entities and help them consolidate their issuances so that the market sees adequate liquidity and gets an idea of the yield spread for bonds issued by these companies. Let these be traded over the counter to support efficient pre-trade anonymity. Settlements may continue on a delivery-versus-payment basis. Once volumes grow, investors will start looking for investment opportunities in bonds of lower-rated companies, provided the pricing is attractive. Let the market for credit default swaps grow with products linked to entities (not to specific bonds) so that there is another market to monitor spreads and assume risks or obtain hedge. Let us also allow overseas financial entities relatively free entry into this market subject to some lock-in period restrictions. These steps should help the corporate bond market consolidate. However, raising huge resources by companies through this market is likely to remain a pipe dream.
Also, there is a lack of support to the securitisation market. India’s financial market is already in an exciting state where a successful securitisation market can help the country achieve much more than what is possible from a successful corporate bond market.
Shyamal Roy, Mumbai
