India’s Debt Market Challenges

Syllabus: GS3/Economy

Context

• The Economic Survey 2024-25 highlighted that India’s debt market remains undercapitalised, and risky borrowers are unable to access it.

About the Debt Market

• Debt Market is the market where fixed income securities of various types and features are issued and traded.
• These are issued by the Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities, like Financial Institutions, Banks, Public Sector Units, Public Ltd. companies and also structured finance instruments.
  • Government bonds, also known as Government Securities (G-Secs), are issued by the Central and State governments to finance their fiscal needs.
  • Corporate bonds are issued by companies to raise funds for their operations and expansion projects.
• Instruments Traded in Money Market: Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such instruments of short-term maturities (i.e., not those exceeding 1 year with regard to the original maturity).

India’s Debt Market: Challenges and Constraints

• Undercapitalisation and Limited Access: The Economic Survey 2024-25 reveals that the corporate bond market in India is only 18% of the country’s GDP, compared to 80% in South Korea and 36% in China.
  • This undercapitalisation is a major hurdle for smaller players and risky borrowers who find it difficult to tap into the market.
• Private Placements Dominance: Private placements account for 99.1% of the total resources mobilised through the bond market, deterring the participation of retail investors.
  • Barriers to Public Issuance: Public issuance of corporate bonds has declined from 12% of total issuances in 2014 to 2% in 2024.
  • In FY24, the public placement of corporate bonds stood at ₹19,000 crore, while private placements amounted to around ₹8.38 lakh crore.
• Regulatory Challenges: Most of the borrowing in the bond market is done by firms with the highest credit ratings (AAA, AA+, and AA), leaving out many smaller companies and non-banking financial companies (NBFCs).
• Liquidity In Debt Market: High entry costs, information asymmetry, and the absence of a secondary market for corporate bonds are major hurdles.
  • These factors make it challenging for risky borrowers to secure funding through corporate bonds.
• Debt Recovery Challenges: Inefficiencies in debt recovery frameworks, including the Insolvency and Bankruptcy Code (IBC) and Debt Recovery Tribunals (DRTs), hinder creditor confidence.
  • The introduction of out-of-court restructuring frameworks, modeled after systems in South Korea, could expedite recoveries and reduce judicial burdens.

Opportunities for India’s Bond Market

• Infrastructure and Green Bonds: The National Infrastructure Pipeline (NIP) with $1.4 trillion capital aimed at accelerating India’s infrastructure development.
  • India is pushing green finance with $10 billion worth of green bonds in 2024, supporting climate-friendly projects.
• Reforming FPI Norms to Boost Liquidity:
  • Allocation limits under the Voluntary Retention Route (VRR);
• Unified Market Operations for Seamless Functioning: To reduce transaction costs, and enhance investor confidence.
• Strengthening Debt Recovery Mechanisms inspired by models in South Korea and the Philippines.

Recommendations for Improvement

• Reducing entry costs, improving information transparency, and establishing a secondary market for corporate bonds could enhance liquidity and accessibility.
• Additionally, relaxing regulations to allow insurance and pension funds to invest in lower-rated bonds could help small players and risky borrowers access the market.

For more detail, please refer to the following link: https://www.nextias.com/ca/current-affairs/14-01-2025/india-debt-market

Source: TH