Corporate debt market in India: Trends and challenges

Abstract

Indian corporate debt market is still in its nascent stages and not as developed as its counterpart in other countries. For instance, India’s corporate debt-to-GDP ratio1 was 51% as on Mar-16 compared to 169% for China and 72% for US. Given the criticality of the corporate debt markets, especially for an emerging economy like India, this subject has been well recorded and there already exists a lot of literature on this subject, most impactful being the H.R. Khan Committee Report, Aug 2016 on the corporate debt market in India. The paper begins with a detailed overview of the borrowing sources for all non-financial listed firms on NSE and BSE2 . It specifically tries to capture the proportion of borrowing sources across sectors and asset quartiles. It is found that the listed firms in India continue to be heavily dependent on bank borrowing, with bank borrowing accounting for 42% of total long term borrowing as on Mar-16 and debentures accounting for just 22% of total long-term borrowing. As expected, the proportion of debenture borrowing increases significantly for larger firms (total assets greater than INR 832Cr) while smaller firms continue to rely on bank borrowing and other borrowing sources to meet their funding needs. Significant variation in sources of funding is observed across sectors (based on NIC code). For instance, debentures account for 39% of total borrowing for Electricity Generation and Distribution companies, while they only account for 18% of total borrowing for manufacturing firms. This paper then further discusses the key challenges plaguing the growth of the Indian corporate market. Broadly, the Indian market is facing four key challenges – transparency, liquidity, market making and investor protection. Market participants continue to look forward to SEBI to resolve these challenges and even H.R. Khan Committee report acknowledges that majority of the steps need to be taken by the regulator to boost the Indian corporate debt market. SEBI has been actively trying to resolve these challenges which have been partially successful in overcoming some of the bottlenecks. But there is still a need to further increase transparency by creating integrated trade repositories, to empower CRAs, to increase standardization across bonds, and to increase liquidity by eliminating some of the over restrictive policies and defining the role for market-makers.