Transparent and Efficient Debt Discovery is Key to Deepening India’s Debt Markets
Traditionally, the state of economic development of a market is a function of the depth of its debt market. This is mainly due to the fact that a wider range of financing avenues offered by the debt markets contributes to the growth of public and private sector companies, thus reducing the pressure on direct government intervention. As a result, compared to a global scale of 149%, Indian debt, bank credit, and corporate bonds only contribute around 63% of India’s GDP. Additionally, debt is hard to come by for entities lower on the rating curve, as evidenced by the fact that while rated loans and bonds are held with AAA / AA rated entities, with an aggregate share of around 68 %, these entities constitute only about 3% of all rated entities in India.
This contrasts sharply with the United States, where AAA / AA rated entities only hold a 7% stake in rated loans and bonds, while a whopping 28% is held by the high yield segment. The depth of the bond markets in the United States is also reflected in the comparatively greater participation of retail investors. In India, the bond markets are not evolved and it is largely the loan market, thus limiting the growth of capital markets and their limited scale.
The role of the corporate bond market in funding India’s growth aspirations has become more critical after the recent economic contraction amid the pandemic. While there is a huge opportunity for a large and deep debt market in the country, the landscape continues to be relatively less explored.
The Indian corporate debt market has been plagued by several problems over the years. A mix of strategic and tactical interventions can help him overcome the problems he has faced over the years:
- Lack of transparency: Any financial instrument can be analyzed and priced, among other things, on the basis of full transparency on the status of the business entity supporting the instrument. The Indian stock market is said to be one of the most difficult stock markets to make money because the instruments are inherently poorly priced due to the lack of disclosure and related clarity on the state of affairs of the issuing entity. And for the debt markets, the status is the same – one cannot determine with complete confidence the capacity to exploit or raise the debt of the business entity, thus inhibiting a free market, even at the current scale of stock markets.
- Data asymmetry and integrity – One of the main concerns of investors has been information asymmetry and data integrity. While there is a substantial amount of digital data footprints available on companies, there is virtually no mechanism to transparently aggregate all of this data and glean meaningful information about companies’ debt capacity, in particular those located downstream of the credit curve. This ultimately leads to a lack of depth in the corporate debt market in India, with very few takers for corporate credit.
- Ineffective price discovery – Lenders and borrowers are constantly on the lookout for the right partners to work with. Uncovering the right opportunities and the right partnerships continues to be one of the biggest problems in debt markets, making price discovery linear.
- 1-1 negotiations – the market is largely driven by one-on-one pricing negotiations for most instruments, which does not lead to a full price discovery mechanism – something that could have been made possible by one-to-one communications. -to-many or many-to-many. India’s approach to finding the debt market is very similar to the retail business of the 90s. We visited different stores to buy clothes, groceries, furniture and so on. The real key to effective debt discovery may lie in a market for institutional debt, the impact of which will be very similar to what Amazon and Flipkart have done on the retail landscape in India.
- Lack of an underlying infrastructure – It’s no surprise that the corporate bond market, after all these years, still lacks an automated order-matching exchange, which for stock markets even relies on millions of phone apps. ‘Indians. We’re scratching the surface, when it comes to the concepts of asset-backed securitization or even peer-to-peer lending, as reconciliation, tracking and regulatory reporting at the granular level of the individual asset is a nightmare for even the most. great lenders. . Several potential investors, including offshore sources of capital, stay away from the otherwise secure structured finance market in India, due to these structural issues.
These factors lead to the most critical differentiator between India’s debt and equity markets – the problem of the liquidity of debt investments. While the equity markets have already gone through the transformation phase which is now leading to unprecedented levels of liquidity, the debt markets are still lagging far behind on this aspect. As the nation’s capital needs increase, debt has a critical role to play in reaching the GDP target of $ 5,000 billion, recognizing the concept as efficient is a challenge that can be overcome. thanks to interventions that block its development.
The opinions expressed above are those of the author.
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