Bonding together

The significant role that the corporate bond market plays in serving the fund-raising needs of companies in conjunction with the equity market and bank credit was clearly evident over the past year. While bank credit to industry contracted 4.1 per cent in 2020-21, corporate bond issuances were higher by 13 per cent, with companies raising about ₹7.8-lakh crore. This shift in fund raising to the bond market is good for the banking system as it diversifies risk. The large liquidity infusion by the Reserve Bank of India in recent times and its tight control on the sovereign bond yield leading to a sharp reduction in corporate bond spreads may have attracted better-run companies to the bond market last year. But companies have been increasingly turning to the bond market in recent years. Average annual growth in bond issuances since 2008 has been 15 per cent, indicating that dispersion of risk is already taking place. This shift should be encouraged since bond market participants dynamically price the issuances based on the market conditions and the risk rating of the borrower unlike banks which are tied down by rigid lending rules.

However, some long-standing issues need to be addressed before the corporate bond market emerges as a reliable conduit for fund raising. Bond issuances have typically been skewed in favour of borrowers with the highest AAA rating with these borrowers accounting for over 80 per cent of the issuances. There is scarcely any demand for non-investment grade securities or those with moderate safety, making it difficult for smaller companies or companies in distress from accessing the bond market. Risk aversion among bond investors following the IL&FS and DHFL episodes is partly responsible for this lower demand. Also responsible are stringent investment regulations for pension, mutual and insurance funds, which is not a bad thing really. Setting up a credit guarantee enhancement scheme for corporate bonds, as proposed in the Union Budget 2019, will help smaller borrowers tap the corporate bond market more easily. Speedier implementation of the tri-party repo with AA and lower rated bonds as collateral will also help increase demand for lower rated paper. The RBI, SEBI, PFRDA and IRDA need to work together to improve the demand for bonds across risk buckets, while taking care of the risk-taking ability of investors.

The other issue with the corporate bond market is the lack of liquidity. Almost 98 per cent of the funds is raised through private placement to institutional investors and high-networth individuals. With most investors holding the securities until maturity, these securities are scantily traded in the secondary market. This hinders participation of retail investors who may wish to trade in these instruments. Coaxing more companies to make public issuances will not only create awareness about these securities, it will also increase turnover and attract more participants.

COMMENT NOW