Debt forms a huge part of financial markets across the world. In the USA, with an outstanding of $40,000 billion, it is almost 1.6 times the size of the equity market.
Debt forms a huge part of financial markets across the world. In the USA, with an outstanding of $40,000 billion, it is almost 1.6 times the size of the equity market. In India, however, it is ~90% of the equity market. While India’s GDP as a share of global GDP is 2.99% (Source: IMF), its share of debt market capitalisation is less than 2% of global outstanding.
Within this small market, again, government securities reign supreme, with corporate bonds relegated to a minority. The corporate bond market is a fifth of the equity market. Worse, the penetration of corporate bonds, as measured by amount outstanding to GDP, was 18% in 2016, up moderately from over 10% at the turn of this decade.
Hindering growth of the market are factors such as dominance of banks in lending, risk appetite of investors limited to higher ratings, regulatory arbitrage between loans and bonds, and prescriptive regulatory limits on investments. Also, retail (individuals) participation in debt markets is almost non-existent, even though the Indian investor psyche is skewed towards fixed income instruments – with as much as 47% of the annual household financial savings flowing into bank fixed deposits, says a joint study by ASSOCHAM and Crisil.
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The study, titled ‘Giving debt its due, says the importance of a thriving corporate debt market cannot be lost on anyone. It would be a win-win for both industry participants and investors – issuers will benefit from being able to generate stable funding at low costs, while investors can get secure and predictable cash flows with higher returns compared with plain-vanilla bank fixed deposits.
In the long run, this also offers economic benefits to the country as a whole, and is growth-conducive. It becomes especially important for funding the government’s ambitious infrastructure agenda, which will require an estimated Rs 43 trillion in the five fiscals to 2020.
ASSOCHAM and Crisil believe three steps will go a long way in deepening this market:
First, facilitate larger institutional investment in corporate bonds: Here mutual funds, insurance companies and pension funds have the best chance of channelling financial savings.
Second, wean companies away from bank loans: Bank financing is by far the most preferred mode of funding in India today and as of September 2016, the corporate bond outstanding to bank loans (corporate) was just 31.73%. For the debt market footprint to expand, it is imperative that more companies come out with bonds.
Third, put in facilitative policies and infrastructure: This is a sine qua non from the perspective of both issuers and investors. Setting up of a dedicated team of experts or department within the Ministry of Finance to facilitate development of the corporate bond market and following up on relevant implementation initiatives will help.
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The individual investor, too, has a role to play. Recent years have seen several encouraging measures from regulators, but the segment hasn’t quite taken off. A vigorous investor education and awareness initiative is, therefore, the need of the hour.