Corporate bond collateral
In a bid to make corporates less dependent on bank loans, the Reserve Bank of India (RBI) and the securities regulator has taken a step towards deepening India’s corporate bond space, noted the Development Bank of Singapore (DBS).
“This is especially relevant as the domestic banking sector faces asset quality concerns and upcoming international regulatory changes which might further impinge on bank lending growth,” said DBS in its market report on August 26. 2016.
Key changes for the corporate bond market includes permitting top-tier corporate bonds to be used as collateral to access central bank liquidity (once the RBI Act is amended to this effect), higher and direct foreign investor participation into such papers and making lower-rated issuers more attractive through better credit enhancement arrangements.
The pool of participants is also likely to be widened, alongside allowing banks to issue rupee-denominated offshore bonds to meet their capital/ financing needs into selected sectors, it pointed out.
Availability of over-the-counter options for hedging needs is also under consideration, according to DBS.
Bank credit still accounts for over two-thirds of the total financing needs of the economy, with external commercial borrowings and corporate bonds (~15% of GDP) making up the rest.
In the present rate cut cycle that started in January 2015, policy transmission into market-based borrowing costs have been more pronounced than bank lending rates.
More recently, even as the RBI is cautious on further rate cuts, comfortable liquidity conditions have helped ease borrowing costs further.
Hence a combination of better financing costs, along with a wider pool of participants and issuers is the right step forward.
Further changes in terms of improving the corporate bond markets’ infrastructure, deepening secondary market volumes, regulatory provisions, reduction in sizeable public borrowings etc., will be required to effectively boost activity in this space, said DBS. fii-news.com
