Developing Corporate Debt Market in India The 3 rd Invest India Debt Market Round Table May 6, 2003 Rakesh Mohan Deputy Governor Reserve Bank of India

Structure of Presentation Public Policy Benefits Public Policy Benefits Stylized Facts in Corporate Debt Market Stylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market Constraints Constraints Pre-conditions Pre-conditions Wholesale Market Wholesale Market Retailing Retailing Current Agenda for Debt Market Reforms Current Agenda for Debt Market Reforms

Public Policy Benefits Contribution to Economic Development Contribution to Economic Development Better intermediation between savers and investors Better intermediation between savers and investors Avenues for long-term saving Avenues for long-term saving Supply of long-term funds for investment Supply of long-term funds for investment More efficient reallocation of capital More efficient reallocation of capital Flexibility in products Flexibility in products Diffuses risks on the banking system Diffuses risks on the banking system Diversifies credit risk Diversifies credit risk  Achieving 8 per cent growth rates in India needs : Larger capital for productive purposes Larger capital for productive purposes

Structure of Presentation Public Policy Benefits Public Policy Benefits Stylized Facts in Corporate Debt Market Stylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market Constraints Constraints Pre-conditions Pre-conditions Wholesale Market Wholesale Market Retailing Retailing Current Agenda for Debt Market Reforms Current Agenda for Debt Market Reforms

Stylized Facts (1) Household Saving Increased Steadily Household Saving Increased Steadily Gross Domestic Saving Rate Household Saving Of which : Financial Saving Private Corporate Saving Public Sector Saving

Stylized Facts (2) Shares of Instruments in Household Financial Savings Shares of Instruments in Household Financial Savings Preference towards bank deposits (Per cent) Preference towards bank deposits (Per cent) to to Currency Bank Deposits Shares and Debentures Net Claims on Government Life Insurance Funds Provident & Pension Funds

Stylized Facts (3) Sources of Funds for Corporate Sector Sources of Funds for Corporate Sector Lower reliance on borrowing and greater reliance on capital market Lower reliance on borrowing and greater reliance on capital market (Per cent) (Per cent) Sources Internal Sources External sources Capital market - Capital market (equity and debt) (equity and debt) Borrowing from - Borrowing from banks / FIs banks / FIs Liabilities / - Liabilities / Provisions Provisions

Stylized Facts (4) Resources Raised from Domestic Debt Market - India Resources Raised from Domestic Debt Market - India About one-third by corporates (including FIs/banks/PSUs/State undertakings / private corporates About one-third by corporates (including FIs/banks/PSUs/State undertakings / private corporates (Per cent) (Per cent) Government (excl T-bills) Corporate

Stylized Facts (5) Resources Raised from Debt market : Emerging Markets Resources Raised from Debt market : Emerging Markets End 2000 End 2000 (Per cent) (Per cent) FIs Central Bank Public Sector Corporate Singapore4393 Korea Malaysia23959 Thailand Asia Latin America

Stylized Facts (6) Total Corporate Debt in India Total Corporate Debt in India Mostly privately placed Mostly privately placed (Rs. Billion) (Rs. Billion) Total Total Of which : Privately Placed (93.2) (95.4) (91.4)

Stylized Facts (7) Issuers in Private Placement Market Issuers in Private Placement Market Dominated by banks, FIs, PSUs & state Govt. guaranteed instruments Dominated by banks, FIs, PSUs & state Govt. guaranteed instruments (Per cent) (Per cent) FIs / Banks 2741 State Financial Institutions 54 PSUs1515 State Level Undertakings 3022 Private Sector 2317

Stylized Facts (8) Secondary Market Turnover in Debt Segment of NSE Secondary Market Turnover in Debt Segment of NSE Dominated by dated Government Securities and T-Bills Dominated by dated Government Securities and T-Bills (Per cent) (Per cent) Govt. Securities Corporate Debt

Stylized Facts (9) Retail Trade Insignificant Retail Trade Insignificant (Per Cent) (Per Cent) Retail Trade Share in Total Turnover

Structure of Presentation Public Policy Benefits Public Policy Benefits Stylized Facts in Corporate Debt Market Stylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market Constraints Constraints Pre-conditions Pre-conditions Wholesale Market Wholesale Market Retailing Retailing Current Agenda for Debt Market Reforms Current Agenda for Debt Market Reforms

Development of Corporate Debt Market (1) Constraints (faced in general in developing economies) Constraints (faced in general in developing economies) Lack of good quality issuers Lack of good quality issuers Lack of institutional investors Lack of institutional investors Lack of Supporting infrastructure Lack of Supporting infrastructure Legal Legal Regulatory Regulatory Technological Technological Preference of corporates to borrow Preference of corporates to borrow Cost of issuances high Cost of issuances high Ease of renegotiation Ease of renegotiation Absence of anonymity Absence of anonymity Fragmentation of market Fragmentation of market

Development of Corporate Debt Market (2) Preconditions (1) Preconditions (1) Well functioning Government Securities market Well functioning Government Securities market Benchmark issues (on-going) Benchmark issues (on-going) Regulatory and legal Infrastructure (in place) Regulatory and legal Infrastructure (in place) Technology (in process) Technology (in process) Clearing and settlement system (in place) Clearing and settlement system (in place) Efficient Money Market (on-going) Efficient Money Market (on-going) Effective transmission of monetary policy Effective transmission of monetary policy Stability in interest rates Stability in interest rates Public disclosures (on going) Public disclosures (on going) To ensure public confidence To ensure public confidence Proper accounting, auditing and disclosure rules Proper accounting, auditing and disclosure rules

Development of Corporate Debt Market (3) Preconditions (2) Preconditions (2) Credit Rating System (exists) Credit Rating System (exists) To determine relative ability of borrower to repay To determine relative ability of borrower to repay Bankruptcy Laws (need attention) Bankruptcy Laws (need attention) To define investors legal ability to enforce repayment To define investors legal ability to enforce repayment Avoid Public Sector Crowding out (no statutory constraint) Avoid Public Sector Crowding out (no statutory constraint) SLR investments SLR investments Availability of Hedging Instruments (on going) Availability of Hedging Instruments (on going) OTC and Screen-based market for derivatives (in process) OTC and Screen-based market for derivatives (in process)

Development of Corporate Debt Market (4) Wholesale Market Wholesale Market  How to make market more liquid  Reform in primary and secondary markets  Enhance disclosures  Rating standards  Accounting standards  Better interest rate risk management (issuers and investors)  Better ALM  Fungibility of corporate debt to increase size  Active consolidation  More frequent marked to market of portfolio  Use of technology

Development of Corporate Debt Market (5) Retailing (1) Retailing (1) SEBI-NCAER Survey (1999) : only 13 million (Approx.) urban investors owned equity shares and / or debentures SEBI-NCAER Survey (1999) : only 13 million (Approx.) urban investors owned equity shares and / or debentures 2001 Census : 27 cities with more than one million population 2001 Census : 27 cities with more than one million population 2001 Census : 395 cities with more than 100,000 and less than 1 million population 2001 Census : 395 cities with more than 100,000 and less than 1 million population The retail market is very wide The retail market is very wide

Development of Corporate Debt Market (6) Retailing (2) Retailing (2) What the investor wants What the investor wants  Transparency  Confidence regarding repayment  Simplicity and convenience of dealing in the market  Technology  Lower costs of dealing in the market  Risk aversion  Ease of exiting market  Liquidity  Screen-based trading exists in Government Securities Market

Structure of Presentation Public Policy Benefits Public Policy Benefits Stylized Facts in Corporate Debt Market Stylized Facts in Corporate Debt Market Development of Corporate Debt market Development of Corporate Debt market Constraints Constraints Pre-conditions Pre-conditions Wholesale Market Wholesale Market Retailing Retailing Current Agenda for Debt Market Reforms Current Agenda for Debt Market Reforms

Current Agenda for Debt Market Reforms G-Sec Market G-Sec Market Swap of Illiquid Debt (active consolidation) Swap of Illiquid Debt (active consolidation) Further Development of Repo Market Further Development of Repo Market Rollover of repos Rollover of repos Sale of Repoed Securities Sale of Repoed Securities Repo in Corporate Securities Repo in Corporate Securities Exchange-Based Derivatives Market Exchange-Based Derivatives Market Market for STRIPS Market for STRIPS When-Issued Market When-Issued Market RTGS RTGS

Conclusion Ultimately, if we need to achieve 8 per cent growth : Ultimately, if we need to achieve 8 per cent growth : Savings and investments have to increase Savings and investments have to increase Funds have to be channeled to most efficient and productive uses Funds have to be channeled to most efficient and productive uses We need to develop the genuine corporate debt market We need to develop the genuine corporate debt market Both wholesale and retail segments need to be developed Both wholesale and retail segments need to be developed RBI is developing the infrastructure in G-Sec market RBI is developing the infrastructure in G-Sec market An efficient retail market would reduce overall costs of intermediation in the economy An efficient retail market would reduce overall costs of intermediation in the economy This Forum should come out with an operational agenda for reform in this segment This Forum should come out with an operational agenda for reform in this segment RBI would be happy to participate in this process with market participants and other regulators RBI would be happy to participate in this process with market participants and other regulators