Developing Corporate Debt Market in India The 3rd Invest India Debt Market Round Table May 6, 2003 - PowerPoint PPT Presentation

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Developing Corporate Debt Market in India The 3rd Invest India Debt Market Round Table May 6, 2003

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

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Title: Developing Corporate Debt Market in India The 3rd Invest India Debt Market Round Table May 6, 2003


1
Developing Corporate Debt Market in IndiaThe
3rd Invest India Debt Market Round TableMay 6,
2003
  • Rakesh Mohan
  • Deputy Governor
  • Reserve Bank of India

2
Structure of Presentation
  • Public Policy Benefits
  • Stylized Facts in Corporate Debt Market
  • Development of Corporate Debt market
  • Constraints
  • Pre-conditions
  • Wholesale Market
  • Retailing
  • Current Agenda for Debt Market Reforms

3
Public Policy Benefits
  • Contribution to Economic Development
  • Better intermediation between savers and
    investors
  • Avenues for long-term saving
  • Supply of long-term funds for investment
  • More efficient reallocation of capital
  • Flexibility in products
  • Diffuses risks on the banking system
  • Diversifies credit risk
  • Achieving 8 per cent growth rates in India needs
  • Larger capital for productive purposes

4
Structure of Presentation
  • Public Policy Benefits
  • Stylized Facts in Corporate Debt Market
  • Development of Corporate Debt market
  • Constraints
  • Pre-conditions
  • Wholesale Market
  • Retailing
  • Current Agenda for Debt Market Reforms

5
Stylized Facts (1)
  • Household Saving Increased Steadily

1981-82 1991-92 2001-02
Gross Domestic Saving Rate 18.6 22.0 24.0
Household Saving 12.6 17.0 22.5
Of which Financial Saving 5.7 9.5 11.2
Private Corporate Saving 1.5 3.1 4.0
Public Sector Saving 4.5 2.0 - 2.5
6
Stylized Facts (2)
  • Shares of Instruments in Household Financial
    Savings
  • Preference towards bank deposits (Per
    cent)

1981-82 to 1990-91 1991-92-1995-96 1996-97 to 2000-01
Currency 15.4 13.2 9.5
Bank Deposits 27.2 31.3 35.6
Shares and Debentures 9.4 17.1 5.1
Net Claims on Government 14.7 7.7 13.2
Life Insurance Funds 9.8 10.5 12.8
Provident Pension Funds 23.5 20.2 23.7
7
Stylized Facts (3)
  • Sources of Funds for Corporate Sector
  • Lower reliance on borrowing and greater reliance
    on capital market


  • (Per cent)

Sources 1990-91 1999-00
Internal Sources 30.9 35.3
External sources 69.1 64.7
- Capital market (equity and debt) 10.7 20.6
- Borrowing from banks / FIs 33.7 11.1
- Liabilities / Provisions 24.6 33.0
8
Stylized Facts (4)
  • Resources Raised from Domestic Debt Market -
    India
  • About one-third by corporates (including
    FIs/banks/PSUs/State undertakings / private
    corporates

  • (Per cent)

Government (excl T-bills) Corporate
1999-00 63 37
2000-01 64 36
2001-02 65 35
9
Stylized Facts (5)
  • Resources Raised from Debt market Emerging
    Markets

  • End 2000

  • (Per
    cent)

FIs Central Bank Public Sector Corporate
Singapore 4 3 93
Korea 13 16 31 40
Malaysia 2 39 59
Thailand 1 0 83 15
Asia 14 12 32 42
Latin America 26 22 32 20
10
Stylized Facts (6)
  • Total Corporate Debt in India
  • Mostly privately placed

  • (Rs.
    Billion)



Total Of which Privately Placed
1999-00 658 613 (93.2)
2000-01 711 678 (95.4)
2001-02 710 649 (91.4)
11
Stylized Facts (7)
  • Issuers in Private Placement Market
  • Dominated by banks, FIs, PSUs state Govt.
    guaranteed instruments


  • (Per cent)

1999-00 2000-01
FIs / Banks 27 41
State Financial Institutions 5 4
PSUs 15 15
State Level Undertakings 30 22
Private Sector 23 17
12
Stylized Facts (8)
  • Secondary Market Turnover in Debt Segment of NSE
  • Dominated by dated Government Securities and
    T-Bills

  • (Per
    cent)

Govt. Securities Corporate Debt
1995-96 84 16
1996-97 90 10
1997-98 92 8
1998-99 90 10
1999-00 96 4
2000-01 97 3
2001-02 98 2
13
Stylized Facts (9)
  • Retail Trade Insignificant



  • (Per Cent)

Retail Trade Share in Total Turnover
1995-96 1.74
1996-97 0.47
1997-98 0.26
1998-99 0.29
1999-00 0.07
2000-01 0.03
14
Structure of Presentation
  • Public Policy Benefits
  • Stylized Facts in Corporate Debt Market
  • Development of Corporate Debt market
  • Constraints
  • Pre-conditions
  • Wholesale Market
  • Retailing
  • Current Agenda for Debt Market Reforms

15
Development of Corporate Debt Market (1)
  • Constraints (faced in general in developing
    economies)
  • Lack of good quality issuers
  • Lack of institutional investors
  • Lack of Supporting infrastructure
  • Legal
  • Regulatory
  • Technological
  • Preference of corporates to borrow
  • Cost of issuances high
  • Ease of renegotiation
  • Absence of anonymity
  • Fragmentation of market

16
Development of Corporate Debt Market (2)
  • Preconditions (1)
  • Well functioning Government Securities market
  • Benchmark issues
    (on-going)
  • Regulatory and legal Infrastructure
    (in place)
  • Technology
    (in process)
  • Clearing and settlement system
    (in place)
  • Efficient Money Market (on-going)
  • Effective transmission of monetary policy
  • Stability in interest rates
  • Public disclosures (on going)
  • To ensure public confidence
  • Proper accounting, auditing and disclosure rules

17
Development of Corporate Debt Market (3)
  • Preconditions (2)
  • Credit Rating System (exists)
  • To determine relative ability of borrower to
    repay
  • Bankruptcy Laws (need attention)
  • To define investors legal ability to enforce
    repayment
  • Avoid Public Sector Crowding out
    (no statutory constraint)
  • SLR investments
  • Availability of Hedging Instruments
    (on going)
  • OTC and Screen-based market for derivatives (in
    process)

18
Development of Corporate Debt Market (4)
  • 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

19
Development of Corporate Debt Market (5)
  • Retailing (1)
  • 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 395 cities with more than 100,000
    and less than 1 million population
  • The retail market is very wide

20
Development of Corporate Debt Market (6)
  • Retailing (2)
  • 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

21
Structure of Presentation
  • Public Policy Benefits
  • Stylized Facts in Corporate Debt Market
  • Development of Corporate Debt market
  • Constraints
  • Pre-conditions
  • Wholesale Market
  • Retailing
  • Current Agenda for Debt Market Reforms

22
Current Agenda for Debt Market Reforms
  • G-Sec Market
  • Swap of Illiquid Debt (active consolidation)
  • Further Development of Repo Market
  • Rollover of repos
  • Sale of Repoed Securities
  • Repo in Corporate Securities
  • Exchange-Based Derivatives Market
  • Market for STRIPS
  • When-Issued Market
  • RTGS

23
Conclusion
  • Ultimately, if we need to achieve 8 per cent
    growth
  • Savings and investments have to increase
  • Funds have to be channeled to most efficient and
    productive uses
  • We need to develop the genuine corporate debt
    market
  • Both wholesale and retail segments need to be
    developed
  • RBI is developing the infrastructure in G-Sec
    market
  • 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
  • RBI would be happy to participate in this
    process with market participants and other
    regulators
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