India has been distinctly lagging behind other emerging economies in developing its long-term debt market (LTDM), be it corporate or municipal bonds. The equity market has been more active, developed and at the centre of media and investor attention. Traditionally, larger corporates have used bank finance, equity markets and external borrowings to finance their needs. Small and medium enterprises face significant challenges in raising funds for growth.
Comparison with other countries
In India, the proportion of bank loans to GDP is approximately 36%, while that of corporate debt to GDP is only 4% or so. In contrast, corporate bond outstanding is 70% of GDP in USA, 147% in Germany, 41% in Japan, & 49% in South Korea. The size of the Indian corporate debt market is very small in comparison to both developed markets, as well as some of the major emerging market economies. For a sample of eight Indian corporates that featured in Forbes 2000, corporate bonds account for only 21% of total long term financing. In contrast, corporate bonds account for nearly 80% of total long term debt financing by corporates in the four developed economies of USA, Germany, Japan and South Korea1. In these countries, the share of corporate bonds is close to 87% for corporates graded above BBB and 66% for the rest. Corresponding figures in major emerging economies such as South Africa, Brazil, China and Singapore, are 57% and 33% for corporates rated above BBB and those rated at BBB or below respectively.
Drawing on the cross sectional experience of G7 countries since the 1970s, it is estimated that the overall capitalization of the Indian debt market (including public-sector debt) could grow nearly four-fold over the next decade. This would bring it from roughly USD 400 billion, or around 45% of GDP, in 2006, to USD 1.5 trillion, or about 55% of GDP, by 2016. This growth, if not crowded out by public sector debt, could result in increased access to debt markets for Indian corporates.
Comparison with the G-Sec Market and Equity Market
In India the long-term debt market largely consists of government securities. The market for corporate debt papers in India primarily trades in short term instruments such as commercial papers and certificate of deposits issued by Banks and long term instruments such as debentures, bonds, zero coupon bonds, step up bonds etc. In 2011, the outstanding issue size of Government securities (Central and State) was close to Rs. 29 lakh crores (USD 644.31 billion) with a secondary market turnover of around Rs. 53 lakh crores (USD 1.18 trillion). In contrast, the outstanding issue size of corporate bonds was close to Rs. 9 lakh crores (USD 200 billion). Moreover, the turnover in corporate debt in 2011 was roughly Rs. 6 lakh crores (USD 133 billion) whereas in 2011, the Indian equity market turnover was roughly Rs. 47 lakh crores (USD 1.04 trillion.)
Some challenges in the Indian market
The total corporate bond issuance in India is highly fragmented because bulk of the debt raised is through private placements. Small and medium-size enterprises are unable to access the debt markets. Furthermore, trading is concentrated in a few securities, with the top five to ten traded issues accounting for the bulk of total turnover. The secondary market is also minuscule, accounting for only 0.03% of the total trading.
Development of the domestic corporate debt market in India is constrained by a number of factors viz: low issuance leading to illiquidity in the secondary market, narrow investor base, high costs of issuance, lack of transparency in trades and so on. The market suffers from deficiencies in products, participants and institutional framework.
All this is despite the fact that India is fairly well placed insofar as pre-requisites for the development of the corporate debt market are concerned. There is a reasonably well-developed government securities market, which generally precedes the development of the market for corporate debt securities. Another emerging economy, South Africa for instance, witnessed nearly a decade long public sector debt market reform before the market for corporate debt securities began to develop. The major stock exchanges in India have trading platforms for transactions in debt securities. Infrastructure also exists for clearing and settlement in the form of the Clearing Corporation of India Limited (CCIL). Finally, the presence of multiple rating agencies meets the requirement of an assessment framework for bond quality.
In the subsequent blogs in this series, our objective is to analyze the evolution of and developments in the Indian corporate debt market over the last couple of decades, identify the challenges and also discuss possible recommendations to further improve and deepen this critical area of the Indian financial system.
1 – Based on data collected for a sample of 72 corporates across 9 countries, including India, for FY 2010-11