developing corporate debt market in india
TRANSCRIPT
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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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Public Policy Benefits
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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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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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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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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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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Development of Corporate Debt Market (2)
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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Development of Corporate Debt Market (3)
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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Development of Corporate Debt Market (4)
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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Development of Corporate Debt Market (5)
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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Development of Corporate Debt Market (6)
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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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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Current Agenda for Debt Market Reforms
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