developing corporate debt market in india the 3 rd invest india debt market round table may 6, 2003...
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Developing Corporate Debt Developing Corporate Debt Market in IndiaMarket in India
The 3The 3rdrd Invest India Invest India Debt Market Round TableDebt Market Round Table
May 6, 2003May 6, 2003Rakesh MohanRakesh Mohan
Deputy Governor Deputy Governor
Reserve Bank of IndiaReserve Bank of India
Structure of Presentation Structure of Presentation Public Policy BenefitsPublic Policy Benefits Stylized Facts in Corporate Debt MarketStylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market
ConstraintsConstraints Pre-conditionsPre-conditions Wholesale MarketWholesale Market RetailingRetailing
Current Agenda for Debt Market ReformsCurrent Agenda for Debt Market Reforms
Public Policy BenefitsPublic Policy Benefits
Contribution to Economic DevelopmentContribution to Economic Development Better intermediation between savers and investors Better intermediation between savers and investors
Avenues for long-term savingAvenues for long-term saving Supply of long-term funds for investmentSupply of long-term funds for investment
More efficient reallocation of capitalMore efficient reallocation of capital Flexibility in productsFlexibility in products
Diffuses risks on the banking systemDiffuses risks on the banking system Diversifies credit riskDiversifies credit risk
Achieving 8 per cent growth rates in India needs :Achieving 8 per cent growth rates in India needs : Larger capital for productive purposesLarger capital for productive purposes
Structure of PresentationStructure of Presentation
Public Policy BenefitsPublic Policy Benefits Stylized Facts in Corporate Debt MarketStylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market
ConstraintsConstraints Pre-conditionsPre-conditions Wholesale MarketWholesale Market RetailingRetailing
Current Agenda for Debt Market ReformsCurrent Agenda for Debt Market Reforms
Stylized Facts (1)Stylized Facts (1)
Household Saving Increased SteadilyHousehold Saving Increased Steadily
1981-821981-82 1991-921991-92 2001-022001-02
Gross Domestic Gross Domestic Saving RateSaving Rate
18.618.6 22.022.0 24.024.0
Household Household SavingSaving
12.612.6 17.017.0 22.522.5
Of which : Of which : Financial Financial SavingSaving
5.75.7 9.59.5 11.211.2
Private Private Corporate Corporate SavingSaving
1.51.5 3.13.1 4.04.0
Public Sector Public Sector SavingSaving
4.54.5 2.02.0 - 2.5- 2.5
Stylized Facts (2)Stylized Facts (2)
Shares of Instruments in Household Financial Shares of Instruments in Household Financial Savings Savings • Preference towards bank deposits Preference towards bank deposits (Per (Per
cent)cent) 1981-82 to 1981-82 to 1990-911990-91
1991-92-1995-1991-92-1995-9696
1996-97 to 1996-97 to 2000-012000-01
CurrencyCurrency 15.415.4 13.213.2 9.59.5
Bank DepositsBank Deposits 27.227.2 31.331.3 35.635.6
Shares and Shares and DebenturesDebentures
9.49.4 17.117.1 5.15.1
Net Claims on Net Claims on GovernmentGovernment
14.714.7 7.77.7 13.213.2
Life Insurance Life Insurance FundsFunds
9.89.8 10.510.5 12.812.8
Provident & Provident & Pension FundsPension Funds
23.523.5 20.220.2 23.723.7
Stylized Facts (3)Stylized Facts (3)
Sources of Funds for Corporate SectorSources of Funds for Corporate Sector• Lower reliance on borrowing and greater reliance on capital Lower reliance on borrowing and greater reliance on capital
marketmarket
(Per (Per cent)cent)SourcesSources 1990-911990-91 1999-001999-00
Internal SourcesInternal Sources 30.930.9 35.335.3
External sourcesExternal sources 69.169.1 64.764.7
- Capital market - Capital market
(equity and (equity and debt)debt)
10.710.7 20.620.6
- Borrowing from - Borrowing from
banks / FIs banks / FIs
33.7 33.7 11.111.1
- Liabilities / - Liabilities /
ProvisionsProvisions24.624.6 33.033.0
Stylized Facts (4)Stylized Facts (4)
Resources Raised from Domestic Debt Market - IndiaResources Raised from Domestic Debt Market - India About one-third by corporates (including FIs/banks/PSUs/State undertakings / private corporatesAbout one-third by corporates (including FIs/banks/PSUs/State undertakings / private corporates
(Per cent)(Per cent)
Government (excl Government (excl T-bills)T-bills)
CorporateCorporate
1999-001999-00 6363 3737
2000-012000-01 6464 3636
2001-022001-02 6565 3535
Stylized Facts (5)Stylized Facts (5)
Resources Raised from Debt market : Emerging Markets Resources Raised from Debt market : Emerging Markets End 2000End 2000 (Per cent)(Per cent)
FIsFIs Central Central BankBank
Public Public SectorSector
CorporatCorporatee
SingaporSingaporee
44 33 9393
KoreaKorea 1313 1616 3131 4040
MalaysiaMalaysia 22 3939 5959
ThailandThailand 11 00 8383 1515
AsiaAsia 1414 1212 3232 4242
Latin Latin AmericaAmerica
2626 2222 3232 2020
Stylized Facts (6)Stylized Facts (6)
Total Corporate Debt in IndiaTotal Corporate Debt in India Mostly privately placedMostly privately placed (Rs. Billion)(Rs. Billion)
TotalTotal Of which : Privately Of which : Privately PlacedPlaced
1999-001999-00 658658 613613
(93.2)(93.2)
2000-012000-01 711711 678678
(95.4)(95.4)
2001-022001-02 710710 649649
(91.4)(91.4)
Stylized Facts (7)Stylized Facts (7)
Issuers in Private Placement MarketIssuers in Private Placement Market Dominated by banks, FIs, PSUs & state Govt. guaranteed instrumentsDominated by banks, FIs, PSUs & state Govt. guaranteed instruments
(Per cent)(Per cent)
1999-001999-00 2000-012000-01
FIs / BanksFIs / Banks 2727 4141
State Financial State Financial InstitutionsInstitutions
55 44
PSUsPSUs 1515 1515
State Level State Level UndertakingsUndertakings
3030 2222
Private SectorPrivate Sector 2323 1717
Stylized Facts (8)Stylized Facts (8)
Secondary Market Turnover in Debt Segment of NSESecondary Market Turnover in Debt Segment of NSE Dominated by dated Government Securities and T-BillsDominated by dated Government Securities and T-Bills
(Per cent)(Per cent)
Govt. Securities Govt. Securities Corporate DebtCorporate Debt
1995-961995-96 8484 1616
1996-971996-97 9090 1010
1997-981997-98 9292 88
1998-991998-99 9090 1010
1999-001999-00 9696 44
2000-012000-01 9797 33
2001-022001-02 9898 22
Stylized Facts (9)Stylized Facts (9)
Retail Trade Insignificant Retail Trade Insignificant
(Per Cent) (Per Cent)
Retail Trade Share in Total Retail Trade Share in Total TurnoverTurnover
1995-961995-96 1.741.74
1996-971996-97 0.470.47
1997-981997-98 0.260.26
1998-991998-99 0.290.29
1999-001999-00 0.070.07
2000-012000-01 0.030.03
Structure of PresentationStructure of Presentation
Public Policy BenefitsPublic Policy Benefits Stylized Facts in Corporate Debt MarketStylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market
ConstraintsConstraints Pre-conditionsPre-conditions Wholesale Market Wholesale Market RetailingRetailing
Current Agenda for Debt Market ReformsCurrent Agenda for Debt Market Reforms
Development of Corporate Debt Market (1)Development of Corporate Debt Market (1)
Constraints (faced in general in developing Constraints (faced in general in developing economies)economies)
Lack of good quality issuers Lack of good quality issuers Lack of institutional investorsLack of institutional investors Lack of Supporting infrastructureLack of Supporting infrastructure
LegalLegal RegulatoryRegulatory TechnologicalTechnological
Preference of corporates to borrow Preference of corporates to borrow Cost of issuances highCost of issuances high Ease of renegotiationEase of renegotiation
Absence of anonymityAbsence of anonymity Fragmentation of marketFragmentation of market
Development of Corporate Debt Market (2)Development of Corporate Debt Market (2)
Preconditions (1)Preconditions (1) Well functioning Government Securities marketWell functioning Government Securities market
Benchmark issuesBenchmark issues (on- (on-going)going)
Regulatory and legal Infrastructure (in place)Regulatory and legal Infrastructure (in place) Technology (in process) Technology (in process) Clearing and settlement system (in place)Clearing and settlement system (in place)
Efficient Money MarketEfficient Money Market (on-going) (on-going) Effective transmission of monetary policyEffective transmission of monetary policy Stability in interest ratesStability in interest rates
Public disclosuresPublic disclosures (on going) (on going) To ensure public confidenceTo ensure public confidence Proper accounting, auditing and disclosure rulesProper accounting, auditing and disclosure rules
Development of Corporate Debt Market (3)Development of Corporate Debt Market (3)
Preconditions (2)Preconditions (2) Credit Rating SystemCredit Rating System (exists) (exists)
To determine relative ability of borrower to repayTo determine relative ability of borrower to repay Bankruptcy LawsBankruptcy Laws (need (need
attention)attention) To define investors legal ability to enforce repaymentTo define investors legal ability to enforce repayment
Avoid Public Sector Crowding out (no statutory Avoid Public Sector Crowding out (no statutory constraint)constraint)
SLR investments SLR investments Availability of Hedging Instruments (on going)Availability of Hedging Instruments (on going)
OTC and Screen-based market for derivatives (in process)OTC and Screen-based market for derivatives (in process)
Development of Corporate Debt Market (4)Development of Corporate Debt Market (4)
Wholesale MarketWholesale Market How to make market more liquidHow to make market more liquid
Reform in primary and secondary marketsReform in primary and secondary markets Enhance disclosuresEnhance disclosures Rating standardsRating standards Accounting standardsAccounting standards
Better interest rate risk management (issuers and Better interest rate risk management (issuers and investors)investors)
Better ALMBetter ALM Fungibility of corporate debt to increase size Fungibility of corporate debt to increase size
Active consolidationActive consolidation More frequent marked to market of portfolioMore frequent marked to market of portfolio Use of technologyUse of technology
Development of Corporate Debt Market (5)Development of Corporate Debt Market (5)
Retailing (1)Retailing (1) SEBI-NCAER Survey (1999) : only 13 million (Approx.) SEBI-NCAER Survey (1999) : only 13 million (Approx.)
urban investors owned equity shares and / or urban investors owned equity shares and / or debenturesdebentures
2001 Census : 27 cities with more than one million 2001 Census : 27 cities with more than one million populationpopulation
2001 Census : 395 cities with more than 100,000 and 2001 Census : 395 cities with more than 100,000 and less than 1 million populationless than 1 million population
The retail market is very wide The retail market is very wide
Development of Corporate Debt Market (6)Development of Corporate Debt Market (6)
Retailing (2)Retailing (2)• What the investor wantsWhat the investor wants
TransparencyTransparency Confidence regarding repaymentConfidence regarding repayment Simplicity and convenience of dealing in the marketSimplicity and convenience of dealing in the market
TechnologyTechnology Lower costs of dealing in the marketLower costs of dealing in the market Risk aversionRisk aversion
Ease of exiting marketEase of exiting market LiquidityLiquidity
Screen-based trading exists in Government Screen-based trading exists in Government Securities MarketSecurities Market
Structure of PresentationStructure of Presentation
Public Policy BenefitsPublic Policy Benefits Stylized Facts in Corporate Debt MarketStylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market
ConstraintsConstraints Pre-conditionsPre-conditions Wholesale Market Wholesale Market RetailingRetailing
Current Agenda for Debt Market ReformsCurrent Agenda for Debt Market Reforms
Current Agenda for Debt Market ReformsCurrent Agenda for Debt Market Reforms
G-Sec MarketG-Sec Market Swap of Illiquid Debt (active consolidation)Swap of Illiquid Debt (active consolidation) Further Development of Repo MarketFurther Development of Repo Market
Rollover of reposRollover of repos Sale of Repoed SecuritiesSale of Repoed Securities Repo in Corporate SecuritiesRepo in Corporate Securities
Exchange-Based Derivatives MarketExchange-Based Derivatives Market Market for STRIPSMarket for STRIPS When-Issued Market When-Issued Market RTGSRTGS
ConclusionConclusion
Ultimately, if we need to achieve 8 per cent growth :Ultimately, if we need to achieve 8 per cent growth : Savings and investments have to increaseSavings and investments have to increase Funds have to be channeled to most efficient and productive Funds have to be channeled to most efficient and productive
usesuses We need to develop the genuine corporate debt market We need to develop the genuine corporate debt market Both wholesale and retail segments need to be developed Both wholesale and retail segments need to be developed RBI is developing the infrastructure in G-Sec marketRBI is developing the infrastructure in G-Sec market An efficient retail market would reduce overall costs of An efficient retail market would reduce overall costs of
intermediation in the economyintermediation in the economy This Forum should come out with an operational This Forum should come out with an operational
agenda for reform in this segmentagenda for reform in this segment RBI would be happy to participate in this process RBI would be happy to participate in this process
with market participants and other regulators with market participants and other regulators