The Hindu Business Line : Debt market for private sector

This has reference to the news item that the RBI has sent a clear signal to banks to advance more credit to productive sectors by reducing its key repo and reverse repo rates to 6.5 per cent and 5 per cent respectively (Business Line, December 7).

As the financial sector reforms were undertaken in the 1990s, banks started lending for working capital as well as term loans which created a favourable situation for universal banking to flourish. The increase in stock valuations ensured that companies could attract the investing community by dangling the carrot of equity appreciation before them.

In the booming equity market, this posed no problem as investors took care of capital needs and banks took care of the working capital as well as long-term needs through their resources. But the market crash and the downturn in the economy means companies cannot access the capital market through new issues in the absence of guarantees about their success. However, there is no dearth of money with our savings-oriented public, which now prefers safe bank deposits, having burnt their fingers by investing in new issues in 2007 and early 2008.

Right now the bond market for public sector undertakings only exists as their repayment is backed by sovereign guarantee. It, therefore, makes sense to develop a bond market for the private sector, backed by bank guarantees.

This will ensure that corporate sector can think of expansion to revive the economy without bothering about the status of the stock market. Investors who want higher returns and regular and safe repayment of their money can invest in guaranteed bonds.

P. E. Muthu Mumbai