Developing Corporate Debt Market in India The 3 rd Invest India Debt Market Round Table May 6, 2003...

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


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


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


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


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


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


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)


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


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


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


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


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



ConstraintsConstraints Pre-conditionsPre-conditions Wholesale Market Wholesale Market RetailingRetailing


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


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


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)


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


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


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



ConstraintsConstraints Pre-conditionsPre-conditions Wholesale Market Wholesale Market RetailingRetailing



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

Developing Corporate Debt Market in India The 3 rd Invest India Debt Market Round Table May 6, 2003...

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