Corporate Bond Booster Dose To Be Administered in 6-8 Months: FM
Measures to bolster corporate bond market will be put in place over six-eight months: FM
Most key recommendations of the HR Khan Committee on deepening the corporate bond market, including weaning large borrowers away from bank credit, have been accepted by the government and will be implemented within 6-8 months, said Finance Minister Arun Jaitley. He was speaking at a seminar on the challenges of developing the bond markets in BRICS (Brazil, Russia, India, China and South Africa) economies.
Jaitley said urgent measures are needed to bolster the corporate bond market considering India’s huge requirement for financing, especially in the infrastructure sector.
At the same event, Economic Affairs Secretary, Shaktikanta Das said banks have become risk averse towards lending. This, he said, makes it necessary to “inject vitality into the corporate bond market” so it can support infrastructure and project funding requirements.
The recommendations of the HR Khan committee include permitting banks to use corporate bonds as collateral at the RBI’s Liquidity Adjustment Facility window. This, however, will require legislative changes. Some others, like allowing foreign portfolio investors to trade directly in debt securities has already been implemented, said Das.
Goals Must Be Realistic
Even as measures are being taken to bolster the corporate bond market,
RBI Deputy Governor R Gandhi called for realistic goals to be set.
He pointed out that even in developed countries, companies predominantly depend on banks for credit.
“We must not be blinkered in squeezing bank finance to forcibly take up corporate bond market. We would do well and act wisely if we keep our efforts in this (direction)...” said Gandhi.
Rules released by the RBI in August will place restrictions on incremental bank credit to large borrowers. These restrictions, which will be implemented over a period of three years starting April 1, 2017, will force large borrowers to tap the corporate bond market.
Gandhi highlighted the impediments that corporates are likely to face when looking to raise funds in the corporate bond market.
“Most of the corporate issuance is of top credit quality. AA- or better than that accounting for 80 percent of all issuance, while BBB or worse account for just 14 percent,” said Gandhi.
According to data compiled by research firm Ace Equity, as of now there are around 56 companies that have total bank loans of more than Rs 10,000 crore. Of the total, 11 companies fall below the investment grade and a further seven are rated “D”.
A major hurdle to cross in the development of the bond market is the demand for corporate paper. Currently, insurance companies and pension funds, the major investors in the corporate bond market in India, have restrictions on the quality of debt instruments that they can invest in.
There have been calls for a review of these thresholds, so as to increase the number of buyers of corporate bonds. But according to Gandhi, that is not what is required.
“Efforts should be focused on facilitating access of low credit and high yielding borrowers to this market. For this to happen, loosening investment guidelines of insurance and pension funds will not be enough,” he said. “What is required is to create an investor category to distribute risk widely.”