Crisil sees bankruptcy code boosting corporate bond market

There is an urgent need to deepen the corporate bond market to meet the economy's rising fund requirements as infrastructure sector alone requires about Rs 43 trillion over next five years, according to credit rating agency Crisil.
It added state-run banks need Rs 1.7 trillion crore to meet Basel-III norms over the next two years.
Deepening the corporate bond market is crucial for oiling a fast-growing economy, Crisil said and expressed optimism that the new bankruptcy code can go a long way in strengthening this segment.
It added that the corporate bond market, which currently provides one-fifth of the outstanding funding to the corporate sector, could deepen with the help of a raft of recent developments such as a conducive macroeconomic milieu, elevated stress at public sector banks, imperatives of financing large infrastructure projects, favourable regulations and ongoing innovations in bond structures.

"A sharp fall in profitability has diminished the ability of public sector banks to generate capital from internal accruals, while weak operational performance, driven by a surfeit of non-performing assets, has made it difficult for them to raise money from capital market.
"Additionally, higher provisioning has weakened their ability to offer competitive interest rates, and if credit demand grows faster, their capital needs will be even higher," Crisil Rating's Chief Analytical Officer Pawan Agrawal said.

He also noted that the country would need Rs 43 trillion for infrastructure sector by 2020, while public sector banks would need to raise Rs 1.7 trillion by March 2019 to conform to Basel-III norms.

This makes corporate bond market crucial for the economy and further steps, including policy impetus, offering protection through innovative credit enhancement mechanisms such as bond guarantee fund, would be required to draw more issuers and investors, he added.
Crisil also said the new Bankruptcy Code can strengthen creditors' rights and can lead to deepening of bond markets.
Further, Crisil said that allowing repos in corporate
bonds is also necessary because trading is low, with investors preferring to hold assets to maturity.
This will add to market's attractiveness for foreign investors even as it helps mutual funds manage their redemptions, it said.

Meanwhile, addressing a seminar on corporate bond market organised by Crisil, Reserve Bank Executive Director Chandan Sinha expressed hope that the new Bankruptcy Code will help deepen the bond market.
He also said adoption of the new IFRS accounting norms, under which one has to do provisioning based on the expected loss, will also help level the field for mark-to-market losses on loans and those on the bonds as well.
Another enabling factor will be the ongoing fiscal consolidation, which will bring down gross fiscal deficit going forward. This will eventually lead to a reduction in the SLR levels itself, which in turn can create room for a deeper corporate bond market, he said.

"Also the new liquidity framework, as it unfolds, would be bond positive," Sinha said.
On the call for making corporate bonds LAF-repoable, he said that is the ultimate objective and as and when that happens, it will add to the liquidity.
But he was quick to add that "it has to first happen in the market before it happens with the central bank. But as we saw, ECB also accepts corporate bonds as part of their QE, this is something to look for," Sinha said.