Development of corporate bond market crucial for long-term financing requirement
The GoI’s NIP contemplates US$1.4t worth of investment in infrastructure assets over five years (discussed in detail subsequently). Given the fiscal constraints, there is limited room for expanding public investment and it is important that financing options, other than government and banks, should be explored.
Infrastructure projects often involve long gestation periods, and domestic financial institutions do not have sufficient capacity to fund such projects. While enhancement of development financial institutions is in progress, they would also be better served by a more robust corporate bond market with far greater secondary market trading liquidity. Unlike developed markets, where long-term debt is largely mobilized from capital markets, India does not presently have the capacity due to lack of depth and breadth in the bond market reflected in very thin secondary market liquidity.
The size of India’s fixed income market was estimated at US$2.4t as of September 2021. Government securities and public sector enterprise bonds dominate the domestic debt market and account for ~92% of overall trading volumes in the secondary market.
The corporate bond market (total bonds outstanding) at 16% of GDP (2021) is an opportunity that remains sub-optimally utilized as compared to Asian peers – South Korea (87%), Malaysia (57%), and China (36%). India’s corporate bond market needs greater breadth with focus on all categories of investment grade bonds.
Private non-bank credit in early stages of evolution with bright future
Private non-bank credit can be described as non-bank, non-NBFC lending in high-yielding and illiquid debt-like instruments. It is typically offered to mid-market firms, which are underserved by traditional sources of capital.
From the borrower’s perspective, private non-bank credit offers flexible capital solutions in terms of structure and longer loan tenures to match the cash flow profiles of the business.
From the investor’s perspective, private credits appeal lies in the higher yields and diversification benefits this asset class offers.
Formation of National Company Law Tribunals and the introduction of a creditor in control Insolvency and Bankruptcy Code, 2016, are the foundation for the growth of private non-bank credit in India. India’s high yield investment class is providing sizeable opportunities to non-traditional players to participate and create value.