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India’s infrastructure and banking sectors will require Rs 10.4 lakh crore from the bond market over the next five years, according to credit rating agency Crisil.
To facilitate this, greater regulatory focus is required in three areas — deepening of the bond market, developing innovative credit-enhancement mechanisms for infrastructure projects, and building investor appetite for banks’ non-equity capital.
Roopa Kudva, Managing Director and CEO, Crisil, said: “The Rs 10.4 lakh crore bond funding required for these two sectors (infrastructure and banking) translates to an average issuance of Rs 2.1 lakh crore annually in each of the next five years.
“This is nearly 60 per cent higher than the average annual issuances made by these sectors in the last three years. This calls for steps to deepen the bond market by encouraging greater foreign participation, and by liberalising investment norms for long-term investors.”
The Indian infrastructure sector alone will need Rs 7 lakh crore from the bond market over the next five years. Currently, bond market finances the infrastructure sector indirectly through specialised institutions.
Pawan Agrawal, Senior Director, Crisil Ratings, “In 2012-13, just five financial institutions issued nearly 60 per cent of the (Rs 1.3 lakh crore) bonds raised to fund infrastructure. Therefore, encouraging direct access of infrastructure projects to bond market is a key priority.”
Access for infrastructure projects to bond markets can be achieved by a strong regulatory and policy focus on developing innovative credit-enhanced structures, allowing banks to provide credit enhancement and facilitating the scale-up of infrastructure debt funds (IDFs).
According to Crisil, Indian banks are also seeking Rs 3.4 lakh crore non-equity capital under the Basel III regulations till March 2018. A good beginning is already visible, as five banks have raised Rs 6,000 crore by issuing Tier II bonds, all rated by Crisil.
Agrawal said: “The key challenge lies in raising Tier I non-equity instruments, due to their riskier features of coupon discretion and principal loss absorption at specified capital thresholds.”
For building investor appetite for such instruments, guidelines for long-term investors will need to include eligibility for Tier I instruments.
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