Corporate Debt Market: What needs to be done - A Reaffirmation - RBI - Reserve Bank of India
Corporate Debt Market: What needs to be done - A Reaffirmation
Shri R. Gandhi, Deputy Governor, Reserve Bank of India
Delivered on Mar 23, 2015
Good morning ladies and gentlemen! 2. I would like to thank CARE Ratings for taking this initiative of holding this Summit on the corporate debt market. As I can see, the seminar is quite exhaustive in content and we will be having some excellent speakers representing various segments of the industry and hence it will be very interesting to hear their views. As a regulator, we in the Reserve Bank do have our own approach to the development of any market, but to hear the market participants is always important for us as it is only when we debate the issues that we can come to a workable solution. I am sure that we will have a lot to pick up from these deliberations that take place here today. Corporate Bond Market in India - Current Status 3. Indian Corporate Debt market has seen some growth in recent years, both in terms of number of issues and amount. The outstanding issues which were at 12,155 as at end March 2011 increased to 18,664 by end Dec 2014. During the same period, the amount outstanding increased from ` 8,895 billion to ` 16,485 billion. While the types issued included fixed rate bonds, floating rate bonds, structured notes and other types, the fixed rate bonds were predominant both in number and value. Another characteristic of the issuances was that almost all issuances were by financial sector entities. Yet another peculiar feature of our Corporate Bond market is that private placements are the norm. The public issuances which were ` 94.51 billion in 2010-11 increased to ` 423.83 billion in 2013-14, though it fell back to ` 90.49 billion in the current year till Feb 2015. The private placements were ` 2187.85 billion in 2010-11, ` 2612.82 billion in 2011-12, ` 3614.62 billion in 2012-13, ` 2760.54 billion in 2013-14 and ` 2692.45 billion in the current year till Dec 2014. The secondary market trading was ` 6053 billion in 2010-11, ` 5938 billion in 2011-12, ` 7386 billion in 2012-13, ` 9708 billion in 2013-14 and ` 10043 billion in the current year till Feb 2015. 4. Though the above mentioned figures do indicate a healthy growth in number and volume of corporate bond market activity, in comparison with government bonds market, the corporate bond market is dwarfed. A comparative position of the governments bonds and corporate bonds as on March 2013 as a proportion of GDP among the major Asian countries in the Table below, reflects India at a very low position vis a vis some of the major Asian countries.
Indian Corporate Debt Market - An Enigma 5. Thus corporate debt market in India has been quite an enigma. We keep talking of the issues that are in the way of its progress and the solutions that could address them. Yet, there has been limited movement in this area despite several attempts and there is some kind of gravity keeping us down. We had the R H Patil Committee Report on corporate bonds and securitization of 2005 which has served as a reference point for all of us. However, the progress in the growth of the corporate debt segment has not been too satisfactory and there is evidently a pressing requirement to revisit this subject. There have been several suggestions made - some have been implemented with mixed success. 6. Yet, as noted earlier, the debt market remains confined largely to financial institutions, and corporates are not much in the picture. Even within this limited perimeter, public issues are less frequent and the preference has been for private placement of debt paper. This is the starting point of the puzzle which we need to analyze. 7. Another part of the puzzle relates to our own achievement. We did experience close to double digit GDP growth in FY08 and our investment ratio was 38.1% in that year- with financing issues not coming in the way. On the face of it one may tend to conclude erroneously that there is no need to get too worried about the absence of development in corporate debt market. After all, have we not got investment rate of 38.1%? The reason why the problem does not appear to be magnified is because we are working at well below our potential. We are not realizing that the paucity in long term resources can severely come in the way of investment. Therefore, the question to be asked is as to for how long can we carry on with this situation. 8. We do have fairly large numbers that are required for financing both industrial growth of 8-10% in the next five years and funds required for infrastructure development. Presently as industrial growth is in the phase of stagnation and infrastructure well below satisfactory levels due to a varied set of factors around policy action, the demand for funds has not really reached the expected levels. Evidently this should not give rise to complacency and we should work in this period in building structures for growing our corporate debt market. Need to Develop the Corporate Debt Market 9. The government has its own limitations when chipping in as the fiscal responsibility targets leave little scope for finding funds. Though the commercial banks do cater to the investment needs of corporate and infrastructure sectors, they are also reaching their own limitations. We have gotten support from FDI and external borrowings, but they have their own pace and size. External borrowings are a good way out when global interest rates are low. But, the repercussions on our external debt are significant, and while we have been permitting ECBs into various sectors, the external debt levels have been rising which has servicing implications. Intuitively we can see that the capital market has to become progressively more relevant in this process of garnering long term funds. 10. Economists contend that the absence of an adequately sized corporate debt market leads to an oversized banking system in any economy. It also results in a large portion of the lending market being excessively regulated, without being subjected to free market forces. Such an imbalance is not desirable, because this becomes the perfect breeding ground for crony capitalism, sloppy lending by banks and careless investments by corporates. Financing of resources through corporate bonds rather than bank finance instills a greater sense of credit discipline among the borrowers as the default events are captured immediately and placed in the public domain. The disclosure requirements act as a big disincentive for default or delayed payment. It has been observed that borrowers take the regulatory norm of 90 days period for a default to be recognised as a Non-Performing Asset as a leeway for withholding the payment till the 89th day from the due date. On the other hand, even a single day default by an issuer of corporate bond will be recognised as default in the market and the information of default will be publicly available. Further, such information / risk will also be reflected in external credit ratings and traded credit derivatives on a real time basis. Pricing of credit also gets diluted in bank financing as credit facilities are extended not only on the basis of credit worthiness of the borrower but also the relationship between the banks and their borrowers. Financing through corporate bonds might remove such distortions to a large extent as investors will demand higher coupon for issues with lower credit worthiness, while borrowers with strong fundamentals and sound business get rewarded by lower cost of financing. Thus there are many advantages of an efficient, well developed and liquid corporate debt market. 11. The importance of a developed debt market viz., the corporate debt market for a country like India, which has an huge and ever growing capital funding requirement is widely acknowledged and although various measures on the regulatory and policy front have been introduced in recent times, concerted efforts from all market participants is required to develop and grow the largely untapped potential of the country’s corporate debt markets. Expert Committees 12. In India, progressively, a number of Committees and Groups were set up by RBI to study the bank financing / funding patterns vis a vis the corporate funding requirements. Prominent among them were the Tandon Committee, Chore Committee, etc. The committees uniformly recommended that corporate reliance on bank finance for short term recurring expenses need to be brought down. Chore Committee specifically recommended the need for reducing the over-dependence of the medium and large borrowers - both in the public and private sectors on bank finance. 13. More recently, a High Level Expert Committee on Corporate Bonds was set up under the chairmanship of Shri R. H Patil which submitted its report in December 2005 and made several recommendations including the need for rationalisation of stamp duty structure and issuance costs, tax deducted at source, encouraging securitization, repos and CDS in corporate bonds, enhancing issuer and investor base, simplifying issuance procedures, etc. 14. In the year 2009, the Committee for Financial Sector Reforms (CFSR) (Chairman: Dr. Raghuram G. Rajan) also looked into the issues inhibiting the corporate debt market and made several recommendations on similar lines. Some of the highlights were to bring all trading related regulation within the purview of SEBI, improve coordination between various concerned agencies where multiple regulators share concern, set up a working group on financial sector reforms with Finance Minister as Chairman, the Committee, had recommended the sequencing approach for corporate finance, which entails developing a number of missing markets as well as complementary development of other sectors in the economy for a healthy development of the corporate bond market. Current Issues 15. There are some key issues that the corporate debt market faces. They need be tackled to facilitate improvement and growth of this segment. Foremost among these are as follows:
Policy Initiatives 16. What are we doing to tackle these issues affecting the corporate bond market? Several measures are being undertaken at the policy level to address these. Some of the recent initiatives by Government, the Reserve Bank, SEBI and other agencies in the direction of developing the corporate debt market are as follows: a) Trade reporting platform: For improving transparency, reporting platforms for OTC trades in corporate bonds, Commercial Paper, Certificates of Deposits, Non-Convertible Debentures and securitized debt has been set up. Till recently, reporting of trades in corporate bonds was done at three different places (FIMMDA’s FTRAC, reporting platform of NSE and BSE). Though multiple reporting platforms were available, majority of trades were reported on FIMMDA platform and cleared through one of the clearing houses of the stock exchanges. The reporting of secondary market trades in corporate bonds and securitised debt by RBI regulated entities has been shifted to stock exchanges with effect from April 1, 2014. b) Pooling account: Clearing houses of the stock exchanges have been permitted to have a pooling fund account with RBI to facilitate DvP-I based settlement of trades in corporate bonds. c) Repo in corporate bond: In 2010, repos in corporate bonds were permitted to regulated and other RBI permitted entities. Guidelines were further relaxed in terms of reduction of minimum haircut requirements and expanding the list of eligible collateral by permitting short term instruments like CP, CD and NCDs of original maturity less than 1 year. Scheduled Urban Cooperative Banks (UCBs) have also been permitted to participate in the repo market subject to adherence to conditions prescribed. d) Credit Default Swaps (CDS) on corporate bonds: CDS on corporate bonds has been permitted to facilitate hedging of credit risk associated with holding corporate bonds. Based on market feedback, short term instruments like CP, CD & NCDs and unlisted but rated corporate bonds have also been permitted as eligible reference obligations. e) Encouraging participation of banks and PDs in corporate bonds:
f) Foreign Portfolio Investors (FPIs):
g) Credit enhancement by IIFCL: It has been mentioned in the Union Budget 2013-14 that IIFCL will provide partial credit guarantee to enhance ratings of bond issues, enabling channelization of long-term funds for infrastructure projects. IIFCL is presently undertaking pilot transactions under its Credit Enhancementinitiative. h) Introduction of Rupee linked offshore bonds by International Finance Corporation (IFC): With an objective to signal confidence in the Indian economy and encourage inflows of USD in India, IFC was permitted to float a rupee linked bond overseas for an amount of USD 1 billion. IFC received very good response and the limit has been fully utilized by IFC. i) Domestic Issuance of bonds by IFC: Approval has also been given to IFC to issue bonds in India worth ` 15000 crore for infrastructure financing. This will also facilitate development of benchmark yield for long term corporate bonds. Way Forward 17. Going forward, we expect a special impetus to the growth of corporate debt market in our guidance to the banks to issue long term bonds to support infrastructure and housing projects. Further, in order to meet the capital requirements under the Basel III Framework, banks will tap the market with their Additional Tier 1 bonds, besides Tier 2 bonds. These developments can usher in emergence of quasi government yield curve, which can serve as benchmark for corporate issuances. When the Basel 3 Framework relating to Large Exposure norms take effect, and as banks reach their limits in supporting direct lending to the corporate sector, corporates be nudged to resort to market borrowing. On top of this, the expected robust economic growth will also compel the corporate sector to approach the market. Keeping all these in perspective, we need to ready ourselves with the following measures to usher in a vibrant corporate debt market:
Conclusion 18. To conclude, the debt markets is undoubtedly a very essential segment of the country’s financial markets and vibrancy in these markets is imperative to meeting the massive funding requirements of the country. I am confident that this Conference proceedings and discussions will lead to specific suggestions for action and provide clarity on issues. 19. I thank you all of you for your time and attention. Inaugural address delivered by Shri R. Gandhi, Deputy Governor at the “CARE Ratings Debt Market Summit -2015” at Hotel Taj Mahal Palace, Colaba, Mumbai. Assistance provided by Ms Anupam Sonal is gratefully acknowledged. |