India's Bond Market Faces Shortfall of Mid-Tier Issuers, Secretary of Department of Financial Services Warns

India Needs to Develop Corporate Bond Market

India's corporate bond market needs to be developed so that companies with lower credit ratings can access capital, according to M Nagaraju, Secretary of the Department of Financial Services. Speaking at the ICPP Growth Conference in New Delhi on Friday, Nagaraju highlighted the issue of limited access to capital for companies that are not top-rated.

In India, a significant 90-95 percent of bond issuances come from companies with AA or above ratings. In contrast, the bulk of the market in the US is comprised of A and BBB-rated companies. The middle tier of the bond market is non-existent in India, leaving companies in infrastructure and manufacturing with limited options for raising debt. These companies often turn to private credit, which is available at interest rates of 12-20 percent. This is not a financing system conducive to broad-based growth.

The bond, currency, and derivatives markets need to work together effectively, according to Nagaraju. This is an area where regulators and government bodies are engaged, and where the high-level committee on banking will also have occasion to consider.

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The cost of capital ultimately reflects broader economic fundamentals and the quality of fiscal management, Nagaraju noted. Banks struggle to lend to companies due to asset-liability mismatches. Banks' balance sheets are stretched by statutory liquidity requirements, liquidity coverage norms, and priority sector obligations. Non-banking financial companies, which have historically reached borrowers that banks do not serve well, are also limited by their own funding and regulatory constraints.

Foreign investors face their own entry barriers and constraints in India when buying lower credit or longer maturity bonds. The result is that India's credit to GDP ratio sits at around 55 percent, well below comparable Asian economies.

Note: Comparable Asian economies are not specified in the original text.

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