The National Bank for Financing Infrastructure and Development (NaBFID) is planning to come out with a credit default swap (CDS) product for infrastructure bonds. The move intends to bolster and expand the corporate bond market.
“We are working to launch CDS product for infra bonds. With CDS, we aim to develop corporate bond market at a large scale. We have started preliminary work and it is still in an early stage,” a senior official said. It is also expected to help increase participation in low-rated bonds, giving more confidence to investors.
High-rated issuers dominate the bond market
Currently, the corporate bond market is dominated by high-rated issuers, with nearly 70% of the primary issuances happen in AAA-rated bonds, according to the data from Primedatabase. “We are reviewing the RBI’s past CDS regulations, planning extensive consultations with market participants and regulators to align guidelines with industry needs and push for product revival. We will urge guideline tweaks since current ones failed to launch the product,” the official said.
CDS is a financial derivative product like an insurance policy, allowing an investor to transfer the risk of a borrower defaulting on debt to another party through regular premium payments. Through this, investors can offset their credit risk. In case of a default, the investor gets the principal amount along with interest. The RBI first issued CDS guidelines in 2011 and revised guidelines followed in 2022. However, the market has not taken-off yet. With NaBFID being the guarantor, the market is expected to kick-off.
What do officials say?
“Though regulators have tried to build the market twice, it failed. However, implementing CDS is still not easy and far from straightforward, given the substantial effort required,” the official said. He added that there should be also regulatory changes in investment policies of insurance companies and pension funds to deepen the corporate bond market and enable access to lower rated bonds.
In September, NaBFID had launched a partial credit enhancement product to ease credit risks and improve the creditworthiness of low-rated debt instruments.