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Fragmented yield curve key hurdle in growth of corp bond mart: Sebi Chief

Most of the G-sec issuances are concentrated in only a few maturity buckets, Tyagi said.

Updated: Sep 04, 2019, 03.30 PM IST
Mumbai: Securities and Exchange Board of India (Sebi) Chairman Ajay Tyagi says fragmented yield curve is a fundamental problem in India corporate bond market, stymieing its growth.

“The first issue is the fragmented yield curve. I feel the fundamental challenge is the absence of a continuous corporate bond yield curve spanning across different maturities and different rating buckets,” Tyagi said at Assocham’s national conference on corporate bond market.

He said primary issuances and trading are majorly concentrated in 10-year and 3-5-year buckets. The longer end of the yield curve is predominantly dominated by debt papers of PSUs (public sector undertakings), financial institutions and select housing finance companies, while shorter end is dominated by non-banking finance companies (NBFCs). As regards rating buckets, approximately 90 per cent of papers are AA and above rated.

He emphasized the importance of having a continuous government bond yield curve for the development of the corporate bond market.

A corporate bond is generally priced on the basis of price of G-sec of comparable tenure. In other words, price of G-sec is the base on which the spread of a corporate bond gets determined. “Naturally, therefore, it is important for us to have a robust, continuous G-sec yield curve. Unfortunately, we do not have the benefit of such a benchmark yield curve,” he said.

“Most of the G-sec issuances are concentrated in only a few maturity buckets. There is a need for seamless transmission of information from G-sec to the corporate bond market,” he said

“One of the ways to achieve this would be through unification of G-Sec and corporate bond market,” he said.

The debt market in India has seen significant growth over the years, but it has been tiled in favour of the G-sec market. Funds raised through corporate bonds increased from around Rs 3.7 lakh crore in 2012-13 increased to Rs 6.5 lakh crore in 2018-19. The corporate bond market has gained significant traction over these years.

It is important, however, to note that corporate bond issuances have remained flat in last three years at an average of about Rs. 6.4 lakh crore. “The plateauing of corporate bond issuances and declining bank credit are inextricably linked to the decline in corporate private investment, resulting in sluggish growth seen in various sectors of the economy,” Tyagi said.

“For the economy to move to the next level of the growth trajectory, it is essential that all means of financing corporate investments, including corporate bond issuances, fire on all cylinders,” he said.

The outlook for the corporate bond market remains positive, with Crisil estimating it to double in next five years. The growth will ride on infrastructure capex funding, regulatory push for incremental funding for non-corporates, stabilisation of the process under the Insolvency and Bankruptcy Code, and improved demand from NBFCs and HFCs.

However, the corporate bond market went through a series of credit events and the ensuing liquidity crisis over the past one year.

Tyagi said the corporate bond market is a disclosure-driven market. “Even a one-day default gets disclosed. The corporate bond market provides mark-to-market requirement in bonds, alerts and cautions investors on the creditworthiness of the borrower,” he said.

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