Rebalancing India’s Debt Market

Syllabus: GS3/ Economy

In News

• Recently, the NITI Aayog Vice Chairman Suman Bery highlights the critical need to rebalance the government debt market and corporate debt market in India. 

What is the Debt Market?

• The debt market, also known as the bond market or fixed-income market, is a financial market where debt instruments are bought and sold. 
• Debt markets are a crucial part of the financial system as they provide a mechanism for governments, corporations, and other entities to secure funding for their operations or projects.
• Types of Debt Instruments: Government Securities (G-Secs), Corporate Bonds, Certificates of Deposit (CDs), debentures etc.

Status of the Corporate Debt Market in India

• India’s corporate debt market has grown in recent years but remains shallow compared to developed economies. While the government raised ₹11.63 lakh crore in FY25 through its robust debt market, the corporate sector raised ₹7.3 lakh crore in the first nine months of the fiscal year, showing a significant gap. 
• This disparity underscores the dominance of government securities (G-Secs), supported by mandatory investments from banks under the Statutory Liquidity Ratio (SLR) framework.

Reasons for an Underdeveloped Corporate Debt Market

• Dominance of Bank Lending: Indian corporates primarily rely on bank credit, as the banking sector has traditionally been the primary source of funding.
• Regulatory Hurdles: Complex regulatory requirements and limited credit rating penetration deter smaller firms from issuing bonds.
• Investor Behavior: Indian investors, both retail and institutional, exhibit a preference for low-risk government securities and fixed deposits.
• Limited Market Infrastructure: Inadequate market-making mechanisms and lack of a vibrant secondary market discourage active participation.
• Low Creditworthiness of Issuers: Many corporates, particularly smaller ones, struggle to achieve credit ratings that inspire investor confidence.

Initiatives to Deepen the Corporate Debt Market

• Mandatory Corporate Bond Listing: SEBI has mandated large corporates to raise at least 25% of their incremental borrowings through corporate bonds.
• Credit Enhancement: Mechanisms such as partial credit guarantees by institutions like the India Infrastructure Finance Company Limited (IIFCL) aim to enhance creditworthiness.
• Tax Incentives: Efforts to create tax-efficient instruments like Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs).
• Retail Participation: Initiatives like Bharat Bond ETFs have been launched to attract retail investors into corporate bonds.
• Reforms in Credit Ratings: Strengthening the credit rating framework to ensure better transparency and reliability.

Way Ahead

• Enhancing Liquidity: Developing active secondary markets with participation from institutional investors such as insurance companies and pension funds.
• Increasing Retail Participation: Promoting awareness about the benefits of corporate bonds.
  • Offering innovative products with low entry barriers and retail-friendly features.
• Improving Credit Accessibility: Expanding access to credit ratings and providing partial guarantees to encourage small and medium enterprises (SMEs) to enter the bond market.
• Leveraging Technology: Utilizing digital platforms to facilitate easier issuance and trading of corporate bonds.

Source: BS