The reason most corporates tend to depend on bank loans instead of tapping the bond market is because the market is only accessible to higher-rated corporates, State Bank of India chairman Arundhati Bhattacharya said on Friday.
At present, the corporate bond market accounts for around 31 per cent of total credit to corporates.
“The only problem that remains is the fact that this market is only open to higher-rated corporate. It is not yet accessible to people with lower ratings,” she said, replying to a question on the steps taken by RBI late last month to deepen the corporate bond market, which has not really taken off as desired due to a host of factors such as lower market depth, absence of a hedging mechanism and lack of a variety of debt instruments entering the market. Even after working on to deepen the market for the past decade or so by the central bank and Securities and Exchange Board of India, it is only about Rs 20 trillion in size, which is only a fraction of the government securities market.
According to Bhattacharya, it is also a reflection of the fact that long-term players such as insurance firms and pension funds in India can be in the bond market only for higher-rated papers. “Therefore they are not at liberty to put more money into those lower-rated papers, but they may be giving higher coupon.” However, she is hopeful that over a period of time, as people understand the risk and as the pace of resolution of stressed assets quickens, people will get more confidence of putting money into lower-rated credit.
It can be noted that since the past few quarters, even banks started investing in the money market instruments as large corporates who are over-leveraged are keeping off bank funding. This had SBI pumping close to Rs 50,000 crore into CPs and CDs in the June quarter alone. Other banks are also heavily into the bond market now.
Among other measures, the RBI had permitted banks to increase the partial credit enhancement given to banks to 50 per cent from the earlier 20 per cent. “These measures are intended to deepen market development, enhance participation, facilitate greater market liquidity and improve communication,” it had said.
With PTI inputs