The following article is an initiative of CNBC TV - 18 and Standard Chartered. It is intended towards awareness among readers.
As India Inc grows, so does the vision of the corporate establishments. They want to think large, aim far and become global. To achieve their goals, they need large pots of money. This can come only from the bond markets. However, Indian bond market is still not evolved fully to provide funds to these business houses to grow. The imminent question is why and what can be done for the bond market to pick up.
Most corporate houses approach banks for credits
Banks have become the first choice for corporate houses because:
Asset liability mismatch: Most corporate require credit for a long timeframe such as 15-20 years. The Indian bond market allows repayment period to a maximum of 7 years where as banks offer 20+ years for credit repayment
Good credit rating required: To borrow in the bond market, the businesses need a good credit rating. Such highly rated companies get competitive rates even at the banks
Named and shamed for default: When a corporate fails to repay in the bond market on time it becomes the talk of the public domain. On the other hand, the banks provide cushion time to repay the dues in case of default without affecting the image of the corporate.
Why is bond market not a preferred choice?
- Not meant for risk averse investors: Those worrying about default will not invest in bonds
- Only corporates with AA rating can go for for bond markets and others get automatically eliminated.
- Bond market not fully developed and unable to suffice the needs. So banks are the only choice.
- Preferred by only those who have sophisticated treasury with a willingness to avail the lower interest rate in the bond market. But these same investors move to banks when the interest rate goes up
- Role of insurance, mutual funds and pension in bond market limited as these businesses are dominated by retail investors. They cannot invest in less than AA rated companies. So they are left with very few investment opportunities
- Getting credit from the banks is easier especially if the need is immediate and for a shorter duration. Raising funds through bond market takes a lot of time as corporates have to prove their creditability.
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