The Centre’s announcement of infrastructural investments of Rs 102 lakh crore is welcome, but the proposed investments can actually fructify only with the emergence of a thriving corporate bond market. Relying mostly on bank funding for long-gestation projects would not be in the interest of transparency or efficiency and is likely to worsen asset-liability mismatches and lead to more non-performing assets. Instead, we need modern, arm’s-length finance and a vibrant and liquid corporate bond market to efficiently fund infrastructure projects. The way forward is to have speedy regulatory coordination between the finance ministry and the alphabet soup of segment regulators of Indian finance, to develop a transparent corporate debt market.
It would better allocate long-term funds for infrastructure, shore up project vetting on a regular basis, and eschew opaque bank funding save for working capital needs.
Hence the need for holistic policy to address demand- and supply-side bottlenecks that stifle an active and liquid corporate bond market.
Banks prefer loans to bonds, as loans can be carried on their books without being marked to market to determine fair value. Further, rigidities and sheer illiquidity in the corporate debt market severely deter market issuances.
The result is that corporate bonds, when issued, tend overwhelmingly to be privately placed and held to maturity.
This needs to change, fast. The way forward is to have an evolved market for credit-risk hedging products such as credit default swaps. In tandem, investors and issuers would need access to derivative instruments to hedge interest rate and currency risks, complete with rational tax treatment, enhanced position limits and liberalised capital controls.
Besides, we need market makers and a central counterparty for corporate bonds, as for government securities.
We also require a uniform valuation methodology for corporate bonds, and repo transactions in them by the central bank, to boost demand. Infrastructure finance needs to be gainfully modernised for the greater good.