MUMBAI // Expanding India’s corporate bond market is vital to the country’s economic growth, as alternative sources of funding for businesses will become essential given the pressures on the country’s banking sector, analysts told a conference yesterday.
The corporate bond market has struggled to gain traction in India. And the country’s public sector banks are facing problems with bad loans and a decline in profitability, making it difficult for them to raise money, meaning in turn that lending will tighten.
India’s GDP accelerated to grow at 7.9 per cent in the quarter to the end of March compared to the previous year, up from 7.2 per cent in the quarter to the end of December, official data released yesterday showed.
Meanwhile, the country is estimated to need about US$650 billion for infrastructure development until 2020, according to Crisil, an Indian ratings and research firm that is part of Standard and Poor’s.
“Such constraints mean the corporate bond market has become crucial to India’s growth story,” said Ashu Suyash, the managing director and chief executive of Crisil.
“We believe a few more steps are necessary to attract investors and issuers. These include policy impetus for issuers to tap bond markets, and offering protection through innovative credit-enhancement mechanisms such as a bond guarantee fund, which will draw a larger set of issuers and investors.”
Jayant Sinha, the minister of state for finance, said the bond markets in India are “sadly not at the level that we would like to be to finance India’s growth”.
Investment in India is desperately needed for power, roads, ports, railways and irrigation, said Gurpreet Chhatwal, the business head of large corporates at Crisil.
“What we have seen in the past was that the investment was largely funded by the banking sector and so now since the investment is going to be double, we believe that corporate bonds are going to be an integral part of this,” he said.
But he said that corporate bonds are “typically in the lowest order of priority” when it comes to corporate borrowing, with the sector favouring external commercial borrowings and bank loans.
Milind Barve, the managing director of HDFC Mutual Fund, said the bond market is beginning to expand, but there are challenges when it comes to investing in corporate bonds in India.
“In India, people are still not as comfortable buying closed-ended products of anything longer than three years,” he said. “If I were to do a five-year or a seven- year or a 10-year corporate bond product, I don’t think there are going to be many takers right now.”
The recent passage of a new bankruptcy law by parliament and the improved macroeconomic environment in India are positives for the corporate bond market, according to Crisil.
Public sector banks need to raise about $25bn of tier-one capital by the end of March, 2019 to conform to Basel III regulations, which will put further pressure on funds available for businesses, research by the firm has revealed.
Pawan Agrawal, the chief analytical officer at Crisil, described India’s corporate bond market as “a sleeping princess”.
“We simply need more issuers beyond the financial sector, which means mandating large companies to raise a portion of their funding requirement through bonds and commercial paper.”
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