India pushes biggest borrowers to rupee bond market

Reserve Bank of India (RBI) is to ask large borrowers to issue more bonds in an unprecedented move to deepen the domestic capital markets and address concentration risks in the banking system.

The RBI has proposed the measure as part of a discussion paper on rules limiting the exposure of banks to individual borrowers.

If enforced in their current form, the new regulations may require India's large corporations to raise a certain percentage of their funding from rupee bonds, forcing many to change financing strategies.

"Large corporate borrowers enjoying term loan limits above a certain threshold from the banking system should necessarily meet a certain minimum extent of their term/project loan requirements from corporate bond market," the RBI said.

Historically, India's bigger business groups have enjoyed strong relationships with the country's banks, giving them little incentive to issue domestic bonds.

However, the RBI wants to tighten single-borrower limits to 25% of a bank's Tier 1 capital from 55% of combined T1 and Tier 2 under current rules, according to the discussion paper.

The limits will also be based on "economic interdependence" to the corporate group, an expansion from direct subsidiaries.

The proposals will bring Indian regulations in line with Basel III standards and are to be fully applicable from January 1 2019. Banks can reduce exposure to individual borrowers, or increase their eligible capital base, or both.

Market feedback on the proposals is due on April 30.

Alternative sources

In tandem with the single-borrower limits, the RBI is promoting the use of rupee bonds and commercial paper as alternative sources of funding.

Requiring companies to sell bonds will add more liquidity to India's shallow domestic bond market and lighten India Inc's dependence on bank loans.

Analysts warn, however, that there will be many practical challenges to spur more companies into the capital markets.

"The intention of the RBI to reduce concentration risk by diversifying to the bond markets is indeed good, but, this will mean Indian companies also have to be more disciplined as bond markets are more ruthless in judging credits", said Ananda Bhoumik, senior director, India Ratings & Research.

State-owned borrowers dominate the rupee bond market, while India's top private corporations rely more on either offshore debt or the local bank market.

Reliance Industries, India's largest private-sector corporate borrower, has issued only one rupee bond in the last six years, raising Rs5bn of five-year money in November 2014 at 8.95%, according to Thomson Reuters Eikon. Yet, the company has been fairly active in the offshore markets.

According to the RBI, among the 1,628 private and non-financial companies it researched during the three financial years from 2010-11 to 2012-2013, only 6.7% of their total borrowings came from the bond markets. These companies borrowed 58.50% of their funds from banks and loans are often short term.

"Average short-term borrowings from banks form around 28.20% of average total borrowings of such companies," the RBI noted.

The central bank wants corporations to tap the CP market in order to overcome bank loan limits, and finance part of their working capital requirements through bonds of three to five years.

"As working capital loans are generally secured by current assets of the borrowers, banks and corporates may mutually decide the issues of sharing securities/collaterals with the investors of such bonds," RBI said.

Indian banks have been asked to start reporting certain large exposure numbers effective April 1 2015.

The RBI has played down the impact of the single-borrower limits on banks, reporting that group exposure averaged just 10.6% of capital for the 10 largest lenders. However, observers argue that smaller Indian banks will have to adjust their lending policies.

"Except for the top few, most Indian banks will struggle to meet this huge shrinking in the group exposure limit," said Bhoumik.

"The top seven Indian banks are reasonably diversified and have a large equity base, but, as we go down the rank, the concentration risk becomes serious for other lenders."

In the paper, the RBI has acknowledged that some of its proposals, such as the plan to assess group exposure by economic interdependence, may be hard to enforce.

"Practical difficulties are envisaged in implementing this criterion in India in terms of information availability and also in view of the current stage of development of financial markets and economy," the RBI said.

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