"Structural incentives" drawing firms to bank financing: RBI

It can be noted that for the last two decades, the Government, Reserve Bank and SEBI have been working on deepening the corporate bond markets.

Mumbai: A senior RBI official on Wednesday blamed "structural incentives" for drawing companies to bank financing, inhibiting them from opting for issuing bonds.

Rajeshwar Rao, the executive director for financial markets operations department, also rued the lack of "disincentives" for unutilised working capital limits as one of the factors limiting corporate bond market development.

It can be noted that for the last two decades, the Government, Reserve Bank and SEBI have been working on deepening the corporate bond markets.

The interventions delivered some successes initially, but the new issuances have plateaued in the last three years.

"There is an inherent structural incentive for the borrowers to prefer bank financing," Rao said, speaking at an event organised by industry lobby here.
Rao said the newly formulated Insolvency and Bankruptcy Code (IBC) can also help the corporate bond market development by throwing open non-investment grade securities to the long term investors like insurance, pension and provident funds.

"We need to consider encouraging long-dated corporate bond issuances and perhaps tax incentives could also address these issues," he said.

Rao said corporate bond market issuances are "good" with the outstanding increasing to over 16 per cent of GDP in FY19 as against under 5 per cent a few years ago.

However, the levels are still lower than even Asean countries like Malaysia, and more efforts are required, he said, adding that we need to strengthen collaborative approach between regulators, issues and investors

Rao particularly pointed out there needs to be an improvement in the lower-rated paper's pick up, which will help even medium-sized enterprises to access it for credit.

He said the Department of Banking Regulation's guidelines on credit enhancement can help low rated issuers for raising bonds at lower costs.

Diagnosing the problem, he said, "Insurance, pension and provident fund industries have traditionally invested in high rated bonds and held securities to maturity without helping much in developing the liquidity in the markets."

Rao added that clearing the "structural issues", such that the bond markets becoming both deeper as well as more liquid, will also be essential.

"A well developed corporate bond market complements the system in providing finance to the real sector for its long term needs. An active market also helps in diversification of risk in the financial system," he said.