Letters:Credible information

In the article, “Fuelling growth with corporate bond” (March 7), Arvind Mayaram has drawn upon his rich experience to make some excellent suggestions for building a robust debt market in India.

 

I would, however, hesitate to compare India’s corporate debt statistic with that of China or Korea, countries with much higher savings rates, particularly in financial assets. Also, India’s gross domestic product structure lacks the size of the industrial corporate sector, potentially the biggest user of corporate bonds, not information technology companies or the service sector and the agro sector.

 

The basic point is well-made: Reliance on bank loans has to decrease. Commercial banks with reliance on short-term deposits are not structured for carrying long-tenure assets. At present most banks’ balance sheets are already weighed down by non-performing assets (NPA) and making them subscribe to bonds directly or indirectly via a Reserve Bank of India order is not advisable.

 

The main blocks to developing a deep corporate bond market are paucity of credit-worthy issuers (barring public sector undertakings where risk of default is low) and of long-term investors like insurance companies, trusts and employee benefit funds. There has to be liquidity and options. This problem will not be rectified by artificial steps like Section 80C relief. If NPAs with the banking system were instead carried by retail investors or employee benefit funds, what would have been the adverse impact on individuals? Unless the corporate governance of private sector companies and their disclosure practice improve, potential investors would continue to be wary of taking term exposure.

 

The final piece is about a robust credit rating system that gives accurate, up-to-date, objective information on credit quality and, hence, pricing. Only then will institutional and retail interest be aroused in corporate bonds of long tenure. Credible information on credit-worthiness is essential for a performing bond market. P Datta   Kolkata