High-Level Banking Panel Considers Review of Bond Taxation and Securitisation to Address SME Credit Gap

Government to Focus on Expanding Secondary Market for SME Financing

The high-level banking committee, announced in Budget 2026, will prioritize the expansion of the secondary market for financing small and medium enterprises (SMEs). According to government officials, the committee will focus on increasing SME participation in the corporate bond market, which currently has more than 95 percent of bond issuances done through top-rated companies, leaving SMEs largely excluded.

To achieve this goal, the government is considering several key ideas, including tweaking the taxation structure for capital gains on corporate bonds, improving the credit profile for SMEs, and securitizing SME bond issuances. These changes aim to make it easier for SMEs to access affordable long-term financing, which is currently limited by banks.

Corporate Bond Market Growth

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India's corporate bond market has experienced significant growth, with outstanding issuances rising from Rs 17.5 trillion in FY15 to Rs 53.6 trillion in FY25, representing an annual growth rate of nearly 12 percent. The market now accounts for around 15-16 percent of India's GDP.

Moving Beyond Bank-Led Credit Architecture

The government believes that India needs to move beyond a purely bank-led credit architecture, with a deeper bond market for SMEs becoming an important supplementary channel, especially for firms that are viable but struggle to access affordable long-term financing. A dedicated SME bond platform with lower Electronic Book Provider thresholds is also under consideration, allowing smaller issuances to come to market.

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Credit Enhancement Support

Stronger credit enhancement support through institutions such as the Credit Guarantee Fund Trust for Micro and Small Enterprises, the National Credit Guarantee Trustee Company, and SIDBI is also being discussed. This would improve the credit profile of SME paper and make it investible for a wider set of institutional investors.

Pooling Structures and Securitization

Pooling structures and pass-through certificate-based securitization may also become important, as individual SME bond issuances are often too small to attract large investors on a standalone basis. Aggregation can help create scale and improve liquidity.

Tax Structure Examination

The capital gains tax structure for bonds is also being examined, with industry representation urging the government to re-examine the current structure. The high-level banking committee will consider making recommendations to the CBDT on this front.

Impact on Investor Interest

The current tax structure has influenced investor interest, with bond investments losing attractiveness after the budget of July 2024. The withdrawal of the concessional tax rate of 5 percent on rupee-denominated corporate bonds, effective from July 2025, has also reduced the attractiveness for Foreign Portfolio Investors (FPIs).