Indian Debt market

Source: By Srinath Sridharan: Mint

The Indian debt market, primarily of the fixed-income variety, can be broadly classified into:

Money Market: Where the borrowing is for tenor of less than a year. Inter Bank Term Money, repo transactions, Certificate of Deposits, Commercial Papers, T-Bills, etc. are some of the money market instruments through which short term requirement of funds are met by banks, institutions and the state and central governments.

Bank and Corporate Deposits: Bank fixed deposits (FDs) have been popular and widely subscribed to, as the feeling of no-default-risk. Corporate deposits are FDs issued by a company (non-bank).

Government Securities: G-Secs are sovereign-rated debt papers, issued by the government with a face value of a fixed denomination.

Corporate & PSU Bond Market: Corporate bonds are issued by public sector undertakings (PSUs) and private firms. These bonds are issued for a wide tenor between 1 year - 15 years. These bonds carry a different risk profile and hence will have associated rating.

The Indian debt market is largely a wholesale market with a majority of institutional investors comprising of mainly banks, financial institutions, mutual funds, EPFO, insurance companies and corporates.

The concentration of these large players has resulted in the debt markets being fairly skewed, evolving into a wholesale & bilaterally-priced trades. It also lacks the retailness and the contractual transparency that the Indian capital markets have been able to build in the past 2 decades.

RBI regulates money markets & G-secs; while SEBI regulates the Corporate debt market & bond markets. The domestic debt market in India amounts to about 67% of GDP while the size of India’s corporate bond market is a mere 16% of GDP — compared with 46% in Malaysia, and 73% in South Korea.

Let’s not even use moral hazarding here to talk of debt being a bad word! Leverage is an essential and acceptable part of business / economic cycles.

Structurally, the debt market remains firmly skewed towards government securities (G-secs). Also the largest investor groups in the G-secs market are the banks, due to their regulatory requirement to invest into SLR.

The Indian corporate bond market has low & unstable trading volumes. Sadly, the corporate bond market remains largely about top-rated financial and public sector issuances. The domestic debt managers have forgotten that the logic of the business of finance is “to price the risk".

If the rating agencies were to behave like their global peers and apply stringent yardsticks, then India may not boast of so many highly rated papers, including many PSUs which have implicit sovereign backing. The way the global scenario appears now with covid-19, and the way Indian domestic markets been in upheaval with slow-down in business sentiment for past 2 years and the knee-jerk reactions of the rating agencies, the only AAA left in the market might be the battery-cell !!

However, in the past few years, the domestic corporate bond market had seen increasing volumes, largely due to financial investments going into it, including retail participation. Also the banks had ceded space to NBFCs over past SP many years. This is because banks found it easier to buy securitisation pools to achieve their PSL targets rather than develop competences that NBFCs had built in serving affinity groups, in smaller cities & towns. And post the ILFS crisis, the markets have started shunning non-banks again. This broken moral compass made the crisis deeper in the market in which the sufferer has been the industries which have been deprived of liquidity, thus further worsening investment sentiments.

The various policy initiatives undertaken in the last few years would take time to fructify and to stabilise. These include the IBC, SEBI’s bond market policies, RBI’s large borrower framework for enhancing credit supply. Some of these have already seen changes / addendums to the original draft, with the intent being to course-correct, for the stability of the markets. We can ill-afford to bring regulatory learnings from global conferences and then attempt to apply those yardsticks, which are present in mature and deeper markets globally. Not until our market depth improves.

For the Indian economy to revive and kick-start again post the covid-19 scenario, our debt markets have to scale up. As a nation, we cannot afford economic stagnation, for which a robust debt market is essential; in which the corporate bond market has to play a key role.

We have seen liquidity hiccups in our markets every few years. The concept of “roll over" of debt paper was usual as our markets did not build long term papers. With the ILFS slowdown, it was easy for name-calling on “ALM mismatch" concept. Not much had been anyways done before and later to address the availability of debt to reduce the ALM mismatches. Also we have played it safe so far by even lending for large infra projects with shorter paper and hoped to roll it over at the end of the debt term. And conference organisers have profited by conducting “deepening debt markets" & “broadening bond market" sessions for too many years now!

From governance perspective, government being the largest borrower, owner of number of institutions which are market participants, as well as the (indirect) regulator of the market needs sensitivity of regulation, transparency and granularity of information and as well as proactive market reforms. With covid-19 impact, various state governments and industries will need further liquidity to stay afloat and to fund various social & sectoral spends.

This is the time that our regulators need to work along with the various governments, especially the states, for smoother ironing of fiscal hiccups and use this to redress any structural glitches. It’s time that there is actual intent to deepen the domestic debt market and to listen to the industry about their requirements. Moral hazarding does not work well or serve any purpose. We cannot afford the scenario of emperor’s new clothes story in our debt markets!