Corporate bonds: Gandhi cautions against ignoring bank funding

Mumbai: Even as the government and the Reserve Bank are working in concert to deepen the corporate bond markets, deputy governor R Gandhi today said we must be "realistic" in our goals and not squeeze out the bank financing in the process.

"When we talk of developing a corporate bond market, we must be realistic about our goals. More importantly, we must not be blinkered in squeezing bank finance to forcibly take up corporate bond market," Gandhi said at the a seminar on BRICS bond market.

"We would do well and act wisely if we keep our efforts in this direction," he added.

Noting that we are not alone in this aspect of reliance on bank finances, Gandhi said even the developed world countries like Germany and Japan have been bank finance-led stories.

In the comments, which come within a month of the RBI coming out with a slew of measures on deepening the corporate bond market, Gandhi also stressed on the need to create a new category of investors to tide over the challenges of finding takers for low-rated bonds.

"Loosening investment guidelines of insurance and pension funds will not be enough. What is required is to create an investor category to distribute risk widely," the deputy governor said.

Many observers have been calling for more liberal guidelines so that the large investor pool of insurance and pension funds finds a way into the corporate debt market.

Gandhi said only 14 percent of the investments in the domestic corporate bond market are in BBB or lower rated paper, while the AAA- and above paper dominates with a 80 percent share.

Stating that it is "unrealistic" to expect the secondary market in corporate bonds to be as liquid as the government bonds, Gandhi said there is a need to deepen the activity.

For this, transparency including the level of defaults will be very important, he said, adding that a bulk 95 percent of the bond raising is through private placements.