'Innovative Debt Products Required'

Speaking to Vatsala Kamat and Niraj Bhatt, he discussed the evolving debt market in the country, industrial scenario and also the issue of corporate governance.

Q: The debt market has tapped funds in excess of Rs 10,000 crore. But, it appears to have evolved more by default, as there was no other route for corporates to raise funds. How do you see this market developing in the future?

A: Till 1991-92, we were in a regulated environment where both the lending and borrowing rates were controlled. Long-term players provided resources at a concessional rate for 15-20 years against government securities. In turn, the funds were lent at a controlled rate.

 

However, in 1991 there was decontrol of both these interest rates. For the first two years, the liquidity was good and the same institutions were able to meet requirements at fairly good rates. Spreads kept improving and complacency had set in. But, just before November 1995, when the credit crunch started setting in, we saw the need to develop a retail network for funding the longer term maturities.

The first attempt to create a retail debt market was late last year when ICICI launched the seven-year bond issue and IDBI followed in February 1996. The equity market being dull, there was a natural appetite among the public to shift to medium term debt. Later, with coupons being the main attraction, long-term debt like the deep discount bonds were also absorbed by the markets.

But as I see it , this market is in its rudimentary stages. So far, money has been raised in an ad-hoc and exploratory manner. The future will have to see greater focus on the segmentation of the market, analysis of customer profile and servicing and redressal of customers. Besides, it is very important that liquidity be created in debt instruments. Creation of a secondary debt market is important if the initial demand is to be sustained.

Q: Do you see a revival in the equities market?

A: For investors to be lured back into the equities market, two things need to happen simultaneously. One, the yield on bonds should drop. Two, investors should overcome the fear of equities, for which incentives should outweigh the risks. This means that scrips should be offered in the market at atttractive prices and market-makers should take the prices of scrips up, to a level where the pain that an investor has undergone is alleviated.

Q: What about interest rates?

A: I see the demand for funds doubling in the next few years from both the industrial and infrastructural sectors. But on the supply side, I do not see an equal rise. This pressure on funds will prevent interest rates from coming down.

How the situation is managed is a macro-economic decision. First, freer access to long-term funding should be the basis of policy decisions. For example, in a recent move, the government has raised the level of investments of non-government provident funds in bonds or securities from 30 per cent to 40 per cent. This will release around Rs 7,000 crore into the system.

Second, a more pro-active approach to the inflow of external commercial borrowings will ease pressure on domestic demand to an extent. Third, foreign direct investments should increase. There are projects in the Far East where certain projects are not permitted to raise domestic funds. By bringing in their own overseas funds, there will be a true inflow of money. Such moves will have a salutary impact and check the increasein cost of funds.

Q: Term lending institutions are required to finance infrastructure projects. Given that resources are raised for the short and medium terms, will this result in any asset-liability mismatch?

A: I don't think so. Institutions like the World Bank, Asian Development Bank and Japan Exim are providing Indian institutions long term funds of 12-17 years. We also have the deep discount bonds which are fairly long-term in nature. As such, there can be no asset-liability mismatch.

But, what is important and necessary for the future of infrastructure projects' funding is product innovation. This stems from the fact that the risks involved are different from those in industrial projects. Risks in infrastructure projects can be classified into pre-implementation, implementation and post-implementation risks.

What people do not understand is that the funding can also be split according to these stages. FIs can fund infrastructure projects during the first two stages, since the loans cannot be securitised. During the post-implementation period, the project can be rated and securitised.

Therefore, innovative instruments would have to be evolved and we in ICICI are on the verge of bringing out one.

Q: Statistics and market feedback indicate that there is a slow-down in the Indian industry. Comment.

A: No, I do not fully prescribe to this view. Disbursements made in the last two years have been higher than that of the preceding 10 years. Also, most of the investments have been in efficient capacity of international standards and are yet to start production.

But, I feel there is a genuine pressure on working capital in the Indian industry. This will only force corporates to default in repayments. At this stage of economic growth, therefore, we must nurture them. Given adequate capital support, our industrial scenario ought not to weaken.

Q: What is the role of an FI nominee on a company's board in corporate governance?

A: Corporate governance is an issue of accountability. Corporates are accour well for shareholders and corporates themselves.