Warning that investor demand for corporate bonds may fall short by Rs 3-4 trillion over the next five fiscal years, rating agency Crisil Wednesday called for additional regulatory steps to fast-track the development of this crucial financial market.
According to the Crisil yearbook on the debt market 2018, the overall supply of corporate bonds is estimated to more than double from Rs 27.4 trillion at the end of fiscal 2018 to Rs 55-60 trillion by the end of fiscal 2023, led by issuances from the financial sector, followed by infrastructure and other companies.
As against this, the overall demand is expected to be over Rs 53 trillion, led by retirement funds, insurance companies, mutual funds, foreign portfolio investors and banks in that order.
"There is an urgent need to bridge a yawning gap of Rs 3-4 trillion that is likely to emerge between demand and supply of corporate bonds over the next five fiscals. But to achieve this, more regulatory steps are needed along with the better implementation of the already announced measures," Crisil said in a note.
If promoted in earnest, the size of the corporate bond market grow to as much as 20 per cent of GDP over the next five fiscals from 16 per cent now, the report said, adding this would still be way short of the levels in developed countries and some Asian peers. For instance this is 73 per cent of GDP in South Korea and 46 per cent in Malaysia, while the same is a whopping 120 per cent in the US.
It can be noted that the past couple of years have seen a marked shift in the debt market with a number of issuers raising funds as the banking system is grappling with rising bad loans. This has seen corporate bonds accounting for as much as 30 per cent of the outstanding system credit in fiscal 2018, compared with 21 per cent in fiscal 2013.
According to Ashu Suyash, managing director and chief executive of the agency, "to structurally bridge the demand- supply gap, we need a big step-up in investor awareness, better coordination across the ecosystem, continuation of regulatory reforms, new instruments and hedging mechanisms.
"While stabilisation of the process and quicker resolutions under the Insolvency and Bankruptcy Code will increase investor confidence, any measure to improve market liquidity will provide a significant leg up," she added.
Also, deepening the market for A-rated bonds will allow a large number of issuers to tap this market at lower interest rates compared to bank loans.
According to Crisil, there are around 2,400 A-rated companies with aggregate long-term bank facilities of about Rs 10 trillion. Better quality paper offer opportunities to diversify the portfolios of investors and improve their returns without substantially increasing the overall portfolio risks, it noted.
"Our A-category ratings have displayed strong credit quality, as reflected in their low default rates and high stability rates over really long timeframes. Improving awareness of their superior risk-return trade-off compared to the AA category issues, and their portfolio diversification benefits are crucial to narrowing the demand-supply gap," Gurpreet Chhatwal, president at Crisil said.
But he was quick to point out that such a development would require wider participation from various investor segments, encouraging well-capitalised entities to undertake market-making, and encouraging innovation.
The agency suggests five steps in the near-term to boost the debt market, which include fast-tracking legislative changes to kickstart the market for credit default swaps; enabling banks and primary dealers to raise funds from RBI's liquidity adjustment facility window through repo of corporate bonds, subject to appropriate haircuts.
Expediting the tripartite repo market to improve liquidity in corporate bonds; setting up the Bond Guarantee Fund of India at the earliest and push partial credit enhancement products of banks to enable innovative, credit- enhanced bonds that help infrastructure sector access long- term funds from insurance and pension funds.
And finally, fine-tuning the many regulatory changes announced in the past few years to balance the needs of both issuers and investors. That apart a better cohesion and synergy among the regulators will also go a long way in bridging the demand-supply gap, concludes the agency.
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