As the demand for credit gains ground, the banking system is again in danger of being undermined; other funding channels such as corporate bonds will need to step up to meet growing demand. Bank credit growth stood at a solid 15.3% in August, and the excess liquidity created during the pandemic is also rapidly shrinking. A recent and timely speech by Reserve Bank of India Deputy Governor T Rabi Sankar draws attention to the issues and challenges facing corporate bond markets. It is essential to increase participation and activity in this market, as these instruments are a source of long-term funding for borrowers and play an important role in spreading credit risk among a wider category of borrowers. , thus contributing to financial stability. While regulators including the RBI, SEBI and IRDAI have put in place a robust technological infrastructure and regulatory framework, they have faced challenges in increasing secondary market liquidity. The market has grown, but at a slow pace. The value of outstanding bonds fell from ₹10.51 lakh crore during FY12 to ₹40.20 lakh crore towards the end of FY22. But the size of the corporate bond market relative to GDP is much smaller compared to other Asian countries.
Secondary market activity is lackluster and trade values have not increased in line with market size. Reasons for this subdued activity include: the average issue size being rather small, the dominance of domestic institutional investors on the platform who adopt a buy and hold strategy, and the widespread use of the placement route. private sector for bond issues. Nearly 98% of primary issues are made to a handful of investors through private placements. The data also shows that only large, well-heeled companies are able to tap into this market; 95% of issuances in FY22 by value from borrowers rated AA and above. Individual participation in the corporate bond trading platform is limited to a few issues, some of which are reserved for retail investors. But there seems to be an appetite for these securities from individual investors, due to the sudden surge in digital bond trading platforms. These digital platforms make it easier to trade listed bonds, albeit in smaller lots, and attract wealthy investors willing to take risks. SEBI may consider making it easier for retail investors to participate in all publicly traded corporate bonds, by lowering the minimum quantity traded on exchanges. This can attract retail investors, who in turn can create demand for lower-rated borrowers willing to pay higher interest rates. As the holding period for retail borrowers is shorter, market activity will also get a boost.
While investors have the means to hedge their interest rate risk in corporate bonds through overnight index swaps, the lack of a credit risk protection instrument is a downside. . The provision of an active repo market for corporate bonds will go a long way to improving turnover on these platforms. The repo market for corporate bonds suffers from the absence of a trading platform, the absence of a central counterparty and too high margins. The establishment of the pension compensation company must also be accelerated.
September 05, 2022