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Why Have Indian Corporate Bond Issues Reached a Record High in FY21?

Editor, TRANSFIN.
Aug 13, 2020 11:33 AM 4 min read
Editorial

Earlier this year, as the COVID-19 pandemic and nationwide lockdown wreaked havoc on the Indian economy, the RBI stepped in to boost liquidity in the system.

One of the ways in which it did this was through a series of Targeted Long-Term Repo Operations (TLTROs), wherein banks could access liquidity from the RBI at a floating rate linked to the repo and invest it in primary and secondary markets.

Many companies saw this as an opportunity to raise capital. And what’s a good way for companies to raise capital? By issuing corporate bonds.

In turn, India’s scheduled commercial banks used this TLTRO-infused capital to purchase these bonds.

This has led to banks’ holdings of rupee notes from companies to reach an all-time high - almost $93bn by late May.

 

Timeline

March, for instance, saw lacklustre bond sales. Then on March 27th, the repo rate was cut and since then the benchmark rate has fallen by 115 basis points to the present 4%. Then there were the numerous credit-boosting schemes, notably the TLTROs.

The result?: In the first two months of FY21 alone, companies raised ₹1.63Lcr ($21.87bn) via corporate bond sales, which was more than twice the number for the same period in FY20 and nearly four times more than the same for FY19. All in all, Indian companies raised over ₹2Lcr ($26.8bn) in Q1FY21, up 53% YoY.

These numbers are all the more remarkable because the first quarter is typically a lean one for bond sales.

The situation is similar abroad. US corporations borrowed at more than twice last year’s pace to raise over $1trn as of May.

Now, lower-rated companies did benefit from the RBI’s actions - bond issuance from such firms rose to a 15-month high in June. But the real big winners were large corporates i.e. Top-rated companies be it Reliance Industries, Tata Group companies, L&T, Mahindra and Mahindra etc. 

And it’s not like private sector banks were the ones buying most top-rated bonds. Public-Sector Banks are cashing in too. For instance, Rural Electrification Corp. Raised ₹1,750cr ($235m) worth of 10-year money in March; more than 50% of its bond issue was subscribed by a single large nationalised bank.

But why are we making a distinction between big and small here?

It’s important to note this because smaller, lower-rated companies - and even many top-rated ones - are likely still suffering from illiquidity despite the RBI’s interventions. That’s because unlike what the US Federal Reserve or the European Central Bank did (which was to directly purchase corporate bonds), the RBI’s support stopped at the level of scheduled commercial banks, who in turn had an indirect mandate to induce liquidity in the wider system. And this may have skewed the process in favour of larger players due to a variety of reasons...

 

One: The Nature of the Indian Bond Market

The Indian corporate bond market isn’t as extensive as those of some other economies. As per an RBI report, corporate bonds comprise less than 20% of GDP, as compared to over 120% in the US. It is also heavily skewed and concentrated, dominated by financial and infrastructure companies, where larger entities are more leveraged than smaller counterparts.

According to SEBI, about 97% of corporate bond issuance and trading is just in the top three categories - AAA, AA+ and AA. For context, in countries like the US, 75% of the trading happens in the next three rating buckets (A, BBB and BB) and only 5% in AAA and AA.

So when banks combed the market to go bond-shopping, the system was already rigged in favour of larger entities.

What’s more, the Indian bond market was already under a lot of stress pre-COVID. Remember the IL&FS default? It was a AAA-rated company and its failure triggered a liquidity crisis and several defaults and ratings downgrades. Then came the DHFL default: the NBFC reneged on its financial obligations and this had a cascading effect on banks that were exposed to DHFL assets.

 

Two: Risk is a Bad Word These Days

It’s easy to see why banks would rather hedge their bets in bonds of big companies than the more obscure ones. It’s the same reason why banks are reluctant to lend to borrowers in general right now - they want to avoid risk. Markets are extremely volatile, economic forecasts are gloomy and there is a high chance that defaults and bad loans could soar in the short-term. Better safe than sorry.

So what do you do when you’re highly risk-averse but you have a lot of money to invest? You place your bets on the most reliable companies - that is, the top-rated ones. And not just the ones within the investment grade category, but the crème de la crème of the corporate world - only those above AA+ can get your money by issuing debt. 

What’s a way to fix the Indian corporate bond market, then? SEBI wants corporate bonds to be traded on stock exchanges the way stocks and Government securities are. Successive RBI Governors have pitched for the same. The Finance Minister even announced intentions to put such a plan into motion in last year’s Budget Speech. But so far, reforms are yet to see the light of day.

For getting out of the current predicament of how to get money to smaller companies, the RBI could step in to directly buy such lower-grade bonds like its peers in the West have. Or banks could simply lend to them. But considering how the market was so overwhelmingly skewed against these smaller firms before, expecting a dramatic turnaround anytime soon would be like building castles in the air.

FIN.

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