Need to develop secondary market for low-rated corporate bonds: Arundhati Bhattacharya

Welcoming the recent steps taken by the Reserve Bank to develop a vibrant corporate bond market, SBI chief Arundhati Bhattacharya said there is a need to develop a secondary market for lower-rated papers for the market as a whole to gain traction.

"The only problem that remains is the fact that this market is only open to higher-rated corporates. It is not yet accessible to people with lower ratings," she told reporters on the sidelines of a SBI Caps Securities event.

She added that long-term investors like insurance companies and pension funds are not able to take part in the about Rs 20 trillion corporate bond market as they are required to invest only in higher-rated paper.

"They are not at liberty to put more money into lower rated papers but they may be giving higher coupon," she said.

Bhattacharya was replying to a question on the steps taken by RBI late last month to deepen the bond market which has not really taken off as desired due to a host of factors such as lower market depth, absence of a hedging mechanism and lack of a variety of debt instruments entering the market.

Even after working on to deepen the market for the past decade or so by the central bank and regulator Sebi, it is only about Rs 20 trillion in size, which is only a fraction of the Government securities market.

It can be noted that since the past few quarters, even banks started investing in the money market instruments as large corporates who are over-leveraged are keeping off bank funding. This had SBI pumping close to Rs 50,000 crore into CPs and CDs in the June quarter alone. Other banks are also heavily into the bond market now.

Bhattacharya, however, exuded confidence that over time, as people understand the risks and as the resolution of stressed assets becomes faster, investors will get more confidence of putting money into lower rated credit instruments as well.

Among other measures, the Reserve Bank had permitted banks to increase the partial credit enhancement given to banks to 50% from the earlier 20%. It also took more steps towards accepting corporate bonds under the liquidity adjustment facility and also permitted brokers in it.

"These measures are intended to further deepen market development, enhance participation, facilitate greater market liquidity and improve communication," the RBI had said.