Debt crisis hits India’s plan to expand corporate bond market

India’s plans to expand its corporate bond market are running up against a year-long credit crisis in another obstacle for Prime Minister Narendra Modi’s efforts to jump-start a sputtering economy.

The sales of rupee bonds rated below AAA have halved so far this year to Rs 69,900 crore ($9.7 billion), as a wave of debt defaults and a funding crunch in the shadow banking sector make investors reluctant to buy riskier notes.

Banks, who are major players in the primary market, are now mostly interested in providing backing for sales of quasi-sovereign and top-rated issuers, Bloomberg -compiled data show.

Opening up India’s corporate bond market to more issuers and investors is an important part of Modi’s pledge to develop a $5 trillion economy by 2024, from $2.7 trillion now, as it will give companies more opportunities to raise funds to spend. But, the nation’s credit crisis is impeding changes to the rupee bond market, which has operated like a cosy club consisting largely of a few big local banks and brokers doing deals based on long-standing relationships.

The slowest growth in the Indian economy since 2013 also makes it harder for companies seeking funds.

“Underwriting for lower-rated issuers has been a challenge,” said B Prasanna, group head for global markets sales, trading and research at ICICI Bank Ltd. “Given the current scenario, post the credit defaults, banks have become conservative in taking on new bond deals because it's taking longer to sell down notes to other participants,” he said.

“Lower-rated issuers are responding by tapping alternative sources of funding, such as borrowing overseas, utilising unused bank lines and selling bonds to individual investors,” Prasanna said. “But that increases their overall funding costs,” he said.

Banks do not have much choice in avoiding risk, considering they have the world’s biggest bad-debt pile at a time when economic growth is stalling. Last month, Finance Minister Nirmala Sitharaman announced the country’s largest banking consolidation in decades, merging several weak lenders with stronger peers.

The government and the central bank have taken a slew of measures to boost liquidity to the shadow banking sector and quell investor wariness, which according to Axis Bank Ltd, are steps that will hopefully ease the problem over next few quarters.

“When markets are illiquid, as they are currently, one needs to carefully calibrate the risk-taking,” said Neeraj Gambhir, president and head of treasury and markets at Axis, which has been the leading rupee bond arranger for more than a decade. “We are participating in all big issuances in the market, and are selectively putting our balance sheet at risk.”

One change due to the weak market is that marquee and frequent issuers are starting to pay fees for bond deals, whereas in the past, they could get it done for free or at a negligible cost because of merchant bankers desire to be ranked high in league tables.

Housing Development Finance Corp and LIC Housing Finance Ltd have paid fees to arrangers in recent bond deals, people familiar with the matter said, asking not to be identified as the details are private. Spokespersons for both companies did not immediately reply to emails seeking comments.

“Now with greater interest rate volatility in bond markets, arrangers have started balancing league table volumes with fees,” said Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership Ltd. “Going forward, we expect many more high credit issuers to start paying fees.”

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