The rise in government borrowings through bonds is impeding the growth of the corporate debt market in the country, Reserve Bank Deputy Governor R Gandhi said on Monday.
“The huge supply of government paper in the country is one of the major impediments to the growth of corporate bond market,” Mr. Gandhi said, addressing a corporate debt event organised by Care Ratings in Mumbai.
Presenting data which showed the inability of the corporate debt market to grow, Mr. Gandhi said every year, the government borrowing only grows “unabated”.
“If we compare with government bond market, the corporate bond market is dwarfed,” he said, adding that as a percentage of GDP, the outstanding government bonds were at 49.1 per cent while corporate bonds were at 5.4 per cent, in 2013.
However, he welcomed the fiscal consolidation plan of the government as a step in right direction which will aid the deepening of the corporate debt market.
“We have seen that the government is progressively trying to reign in the deficit at absolute level which will put less pressure on the market,” he said.
These comments have come at a time when there is growing speculation that RBI’s role in public debt management will be given to a professional agency.
Mr. Gandhi also said the RBI’s move to gradually reduce the Statutory Liquidity Ratio (SLR), or the amount of government bond holdings for banks, will also be beneficial to the corporate debt market.
With the banking system plagued with rising NPAs (non-performing assets), shifting to the corporate bond market for funds is very desirable, Gandhi said.
He said borrowers take undue advantage of the 90-day window in NPA recognition and pay up on the 89th day, but same is not possible in case of corporate bonds where they have to pay up on a given day.
Similarly, pricing of funds is also very transparent in a corporate bond market unlike the bank loans.
Mr. Gandhi said there is a need to reassess the role played by institutional investors in the corporate debt market.
He further added, corporates should focus on coming out with more public issues of debt rather than having private placements as is the practice currently.
Mr. Gandhi said the role of institutional investors such as pension funds, provident funds and insurance companies must be reassessed.
“They do need to take some initiative and be aggressive in actively managing their portfolios. Their investment horizons should not be confined to AA and above instruments only,” he said.
On the foreign portfolio flows, Mr. Gandhi said that they were being reviewed from time to time.
“Consistently we have been monitoring the level of flows that are coming in this segment. And the limits that we have kept are based on such assessment. If there should be full utilisation of limit, then we will have to review the situation vis-à-vis the country’s total external debt position,” he said.
Answering a specific question on Shariah-compliant bonds, Mr. Gandhi said that the government will take a final call on the matter.
“The current legal framework as it stands today is inadequate to facilitate these kind of instruments. Parliament has to take a call and make appropriate legal enablement,” he said.
Meanwhile, Gandhi also said that managing the high NPAs is not the only solution for improving efficiencies at banks, but they should also adopt other measures like capital conservation by staying off assets which provide for higher provisioning.
