A three-pronged approach based on facilitating larger institutional investment in corporate bonds together with weaning companies away from bank loans and ensuring facilitative policies and infrastructure from perspective of both issuers and investors is imperative for comprehensive development of debt market in India, suggested a recent ASSOCHAM-Crisil joint study.
"Setting up of a dedicated team of experts or department within the Ministry of Finance to facilitate development of the corporate bond market and following up on relevant implementation initiatives will help," suggested the study titled, 'Giving debt its due,' jointly conducted by ASSOCHAM and Crisil thereby highlighting the need to put in facilitative policies and requisite infrastructure.
As part of facilitating larger institutional investment in corporate bonds - mutual funds, insurance companies and pension funds have best chance of channeling financial savings. While bank financing is by far the most preferred mode of funding, as such more companies should come out with bonds.
"The Indian bond market has not grown the way it should have due to structural constraints dominance of banks in lending, risk appetite of investors limited to higher ratings, regulatory arbitrage between loans and bonds and prescriptive regulatory limits on investments," noted the study.
Factors such as dominance of banks in lending, risk appetite of investors limited to higher ratings, regulatory arbitrage between loans and bonds, and prescriptive regulatory limits on investments are hindering the growth of corporate bond market in India.
"Also, retail (individuals) participation in debt markets is almost non-existent, even though the Indian investor psyche is skewed towards fixed income instruments with as much as 47 percent of the annual household financial savings flowing into bank fixed deposits," said the report.
Highlighting the importance of a thriving corporate bond market, it said, "It would be a win-win for both industry participants and investors - issuers will benefit from being able to generate stable funding at low costs, while investors can get secure and predictable cash flows with higher returns compared with plain-vanilla bank fixed deposits."
The report further stated that in the long run, this also offers economic benefits to the country as a whole, and is growth-conducive as it becomes especially important for funding the government's ambitious infrastructure agenda, which will require an estimated Rs. 43 trillion in the five fiscals to 2020.
Considering the major role of individual investors, the study highlighted the urgent need to promote vigorous investor education and awareness initiatives as part of encouraging measures undertaken by regulators.