RBI deepens Indian Corporate Bond Market

By:  Kartik Gupta

Reserve Bank of India unleashed a plethora of measures that could propel the Indian corporate bond market to global standards and eliminate the risks of large non-tradable exposure to a particular group.

The measures include - 

1. Staggered reduction of banks' loan exposure.

2. Increase participation by overseas investors in corporate bonds

3. Making top rated bonds eligible for borrowing from RBI for liquidity needs.

RBI has allowed brokers to participate in the corporate bond repo market as well to enhance depth in the system. The dependence on bank credit will now come down significantly with lower-rated corporates getting access to corporate bond market. 

THE WINNERS

Credit rating agencies: As more and more firms begin visiting the bond market, they will need their bonds to be rated by credit rating companies. Also, exposure of banks towards firms and non-banking financial companies above Rs.200 crore, if unrated, will attract a risk weight of 150%. This means banks will chase clients to get their debt rated. Business will boom for rating agencies.

‘AAA’ rated corporates: Top-rated credit will always get the best price. In this case, asking such firms to move to the bond market at a time when bank loan rates are higher than bond yields benefits them immensely. A top-rated firm can raise five-year money through bonds around 7.6% while borrowing from a bank could cost it at least 9%.

Foreign portfolio investors (FPIs): FPIs will find it easier to trade in corporate bonds because of the direct access given to them now. Having removed the need for middlemen a.k.a. banks and brokers, FPIs will find their cost of trading come down and, thus, returns going up.

 
THE LOSERS

Indian banks: Firstly, there will be loss of business to the bond market as firms will move from bank loans to issuing paper. Banks wanting to retain good clients and willing to invest in bonds will have to settle for tighter spreads as bond yields are at least 150 basis points lower than loan rates currently. Stepping up to competition and bringing down loan rates will again result in loss of margins for banks.

Low-rated firms: Allowing banks to give a higher partial credit enhancement of 50% of issue size will make it easier for low-rated firms to get investors. But a partial credit enhancement to boost credit rating comes at a price as the banks will charge a fee. Also, once better rated firms flood the bond market and begin cornering investors, lower rated firms will find it even more difficult to attract buyers.