Developing Corporate Debt Market in India

7/29/2019 Developing Corporate Debt Market in India

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Developing Corporate Debt Market in

India

The 3rd Invest India

Debt Market Round TableMay 6, 2003

Rakesh Mohan

Deputy GovernorReserve Bank of India


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Structure of Presentation

Public Policy Benefits

Stylized Facts in Corporate Debt Market

Development of Corporate Debt market

Constraints Pre-conditions

Wholesale Market

Retailing

Current Agenda for Debt Market Reforms


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Contribution to Economic Development Better intermediation between savers and investors

Avenues for long-term saving

Supply of long-term funds for investment

More efficient reallocation of capital Flexibility in products

Diffuses risks on the banking system

Diversifies credit risk

Achieving 8 per cent growth rates in India needs : Larger capital for productive purposes


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Development of Corporate Debt market Constraints

Pre-conditions

Wholesale Market

Retailing



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Stylized Facts (1)

Household Saving Increased Steadily

1981-82 1991-92 2001-02

Gross Domestic

Saving Rate

18.6 22.0 24.0

Household Saving 12.6 17.0 22.5

Of which : Financial

Saving

5.7 9.5 11.2

Private CorporateSaving

1.5 3.1 4.0

Public Sector Saving 4.5 2.0 - 2.5


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Stylized Facts (2)

Shares of Instruments in Household Financial Savings

Preference towards bank deposits (Per cent)

1981-82 to 1990-

91

1991-92-1995-96 1996-97 to 2000-

01

Currency 15.4 13.2 9.5

Bank Deposits 27.2 31.3 35.6

Shares and Debentures 9.4 17.1 5.1

Net Claims on

Government

14.7 7.7 13.2

Life Insurance Funds 9.8 10.5 12.8

Provident & Pension

Funds

23.5 20.2 23.7


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Stylized Facts (3)

Sources of Funds for Corporate Sector Lower reliance on borrowing and greater reliance on capital market

(Per cent)

Sources 1990-91 1999-00

Internal Sources 30.9 35.3

External sources 69.1 64.7

- Capital market

(equity and debt)

10.7 20.6

- Borrowing from

banks / FIs

33.7 11.1

- Liabilities /

Provisions

24.6 33.0


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Stylized Facts (4)

Resources Raised from Domestic Debt Market - India About one-third by corporates (including FIs/banks/PSUs/State

undertakings / private corporates

(Per cent)

Government (excl T-bills) Corporate

1999-00 63 37

2000-01 64 36

2001-02 65 35


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Stylized Facts (5)

Resources Raised from Debt market : Emerging Markets

End 2000(Per cent)

FIs Central

Bank

Public

Sector

Corporate

Singapore 4 3 93

Korea 13 16 31 40

Malaysia 2 39 59

Thailand 1 0 83 15

Asia 14 12 32 42

Latin

America

26 22 32 20


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Stylized Facts (6)

Total Corporate Debt in India

Mostly privately placed

(Rs. Billion)

Total Of which : Privately

Placed

1999-00 658 613

(93.2)

2000-01 711 678

(95.4)

2001-02 710 649

(91.4)


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Stylized Facts (7)

Issuers in Private Placement Market

Dominated by banks, FIs, PSUs & state Govt. guaranteed instruments

(Per cent)

1999-00 2000-01

FIs / Banks 27 41

State Financial

Institutions

5 4

PSUs 15 15

State Level Undertakings 30 22

Private Sector 23 17


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Stylized Facts (8)

Secondary Market Turnover in Debt Segment of NSE

Dominated by dated Government Securities and T-Bills

(Per cent)

Govt. Securities Corporate Debt

1995-96 84 16

1996-97 90 10

1997-98 92 8

1998-99 90 10

1999-00 96 4

2000-01 97 3

2001-02 98 2


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Stylized Facts (9)

Retail Trade Insignificant

(Per Cent)

Retail Trade Share in Total Turnover

1995-96 1.74

1996-97 0.47

1997-98 0.261998-99 0.29

1999-00 0.07

2000-01 0.03


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Wholesale Market

Retailing



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Development of Corporate Debt Market (1)

Constraints (faced in general in developing economies) Lack of good quality issuers

Lack of institutional investors

Lack of Supporting infrastructure

Legal Regulatory

Technological

Preference of corporates to borrow

Cost of issuances high

Ease of renegotiation

Absence of anonymity

Fragmentation of market


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Preconditions (1) Well functioning Government Securities market

Benchmark issues (on-going)

Regulatory and legal Infrastructure (in place)

Technology (in process)

Clearing and settlement system (in place)

Efficient Money Market (on-going)

Effective transmission of monetary policy

Stability in interest rates

Public disclosures (on going)

To ensure public confidence

Proper accounting, auditing and disclosure rules


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Preconditions (2) Credit Rating System (exists)

To determine relative ability of borrower to repay

Bankruptcy Laws (need attention)

To define investors legal ability to enforce repayment Avoid Public Sector Crowding out (no statutory constraint)

SLR investments

Availability of Hedging Instruments (on going)

OTC and Screen-based market for derivatives (in process)


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Wholesale Market

How to make market more liquid

Reform in primary and secondary markets

Enhance disclosures

Rating standards Accounting standards

Better interest rate risk management (issuers and investors)

Better ALM

Fungibility of corporate debt to increase size

Active consolidation More frequent marked to market of portfolio

Use of technology


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Retailing (1)

SEBI-NCAER Survey (1999) : only 13 million (Approx.) urban investors

owned equity shares and / or debentures

2001 Census : 27 cities with more than one million population

2001 Census : 395 cities with more than 100,000 and less than 1 millionpopulation

The retail market is very wide


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Retailing (2) What the investor wants

Transparency

Confidence regarding repayment

Simplicity and convenience of dealing in the market

Technology Lower costs of dealing in the market

Risk aversion

Ease of exiting market

Liquidity

Screen-based trading exists in Government SecuritiesMarket


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Wholesale Market

Retailing



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G-Sec Market

Swap of Illiquid Debt (active consolidation)

Further Development of Repo Market

Rollover of repos

Sale of Repoed Securities

Repo in Corporate Securities

Exchange-Based Derivatives Market

Market for STRIPS

When-Issued Market

RTGS


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Conclusion

Ultimately, if we need to achieve 8 per cent growth : Savings and investments have to increase

Funds have to be channeled to most efficient and productive uses

We need to develop the genuine corporate debt market

Both wholesale and retail segments need to be developed RBI is developing the infrastructure in G-Sec market

An efficient retail market would reduce overall costs of intermediation in

the economy

This Forum should come out with an operational agenda forreform in this segment

RBI would be happy to participate in this process with market

participants and other regulators

Documents

Developing Corporate Debt Market in India