Banks and infrastructure sectors will require Rs 10.4 trillion (or Rs 10.4 lakh crore) from the bond market over the next 5 years, Crisil said in a report.
“To facilitate this, greater regulatory focus is required in three areas - deepening of the bond market, developing innovative credit-enhancement mechanisms for infrastructure projects, and building investor appetite for banks’ non-equity capital,” it said.
The Rs 10.4 trillion bond funding required for these two sectors translates to an average issuance of Rs 2.1 trillion annually in each of the next five years, it said.
This is nearly 60 per cent higher than the average annual issuances made by these sectors in the last three years, it said, adding, this calls for steps to deepen the bond market by encouraging greater foreign participation, and by liberalising investment norms for long-term investors.
The infrastructure sector alone will need Rs 7 trillion from the bond market over the next five years, it said.
Currently, bond market finances the infrastructure sector indirectly through specialised institutions.
Banks also seek Rs 3.4 trillion non-equity capital under the Basel III regulations till March 2018. A good beginning is already visible, as five banks have raised Rs 6,000 crore by issuing Tier II bonds, it said.
The key challenge lies in raising Tier I non-equity instruments, due to their riskier features of coupon discretion and principal loss absorption at specified capital thresholds, it said.
For building investor appetite for such instruments, guidelines for long-term investors will need to include eligibility for Tier I instruments, it added.
The bond market has witnessed sizeable growth in issuances and increasing participation by issuers and investors, it said.
Encouragingly, it said, there have been several innovations in the bond market during 2013, including the first 50-year rupee bond and the first inflation-indexed debentures by Indian companies, five Basel III compliant issues by banks, and the launch of two infrastructure debt funds.