Stimulus calls for a bond–market–Economic Times

Clipped from: https://economictimes.indiatimes.com

The Centre needs to provide focused policy attention for an active and vibrant corporate bond market, so as to raise long-term funds for an infrastructure-led investment boom, to generate demand in the economy. The recent Rs 75,000 crore funding package for non-banking financial companies (NBFCs), housing finance companies (HFCs) and micro, small and medium enterprises (MSMEs) helps create a thriving debt market, and would need it to take off.

Corporate debt remains privately placed, almost 98% of the total corpus raised. That makes for opacity and worse; top AAA-rated bonds held to maturity can well turn out to be duds, as happened with IL&FS. The way forward clearly is for the government to policy-induce insurance and pension funds to invest bonds issued to fund viable infrastructure projects. The government will have to take the lead in creating a corporate bond market. Issue fresh equity in existing and new vehicles. These can raise funds by issuing bonds that RBI can purchase. With this money in hand, these State-owned vehicles can invest in corporate and NBFC bonds to finance infrastructure bonds. Once such a large supply of bonds start trading, investors, including foreign ones, would join in, provided credit, interest and currency derivatives of the requisite kinds are available to hedge against risk. Transaction taxes should go and the burden of stamp duty be minimal and uniform across states, with an overall cap. We do need to discourage bank funding for long-gestation projects, as it inevitably leads to routine asset-liability mismatches. Outstanding bank credit to the infrastructure sector has declined to 12% of non-food credit from 16% in 2016.

The Centre needs to operationalise the Credit Guarantee Enhancement Corporation, announced last fiscal, without delay — most infrastructure loan assets typically are rated BBB– or lower. The assets managed by pension and insurance funds exceed Rs 55 lakh crore. The estimate is that institutional credit guarantee can purposefully free up about Rs 3.5 lakh crore of bank exposure to the infrastructure sector.

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