India needs a vibrant corporate debt market

The health of an economy largely depends on the very functioning of the financial system and as such the vital requirement is to pep up the same in a fast and consistent manner. But the trends in many of developing economies show and indicate that the corporate debt market still remains at a very moderate level, which, in turn, needs to be geared up especially considering the recently gained experiences in the financial world.
The debt market is any market situation where the trading of debt instruments takes place - debt instruments include mortgages, promissory notes, bonds, and Certificates of Deposit and as such debt market establishes a structured environment where these types of debt can be traded with ease between interested parties.
The Indian debt market is the third largest in Asia, next to Japan and South Korea. The potentialities remain largely untapped and thus a vast scope exists on this score. The key role of the debt markets in the emerging economies like Indian economy emanates from the reasons: efficient mobilisation and allocation of resources; financing the development activities of the government; transmitting signals for implementation of the monetary policy and what is more - facilitating liquidity management in tune with overall short term and long term objectives. Since the government securities are issued to meet the short term and long term financial needs of the government, they are not only used as instruments for raising debt, but have also emerged as key instruments for internal debt management, monetary management plus short term liquidity management. The returns earned on the government securities are normally taken as the benchmark rates of returns which are virtually risk free return.
One of the main advantages to participating in a debt market is that the degree of risk associated with the investment opportunities is comparatively very low, especially for investors who are focused on avoiding riskier ventures in favour of making a smaller but more or less guaranteed return. The returns may never be considered spectacular. It is possible to earn a significant amount of money over time if the right debt market offerings are chosen.
By offering the instruments on a market that is regulated and has a solid working process, it is possible to interact with a larger base of investors. The development of Indian debt market is everyone's desire and naturally due attention is to be paid by all concerned. The plus point is that the banking system has emerged to be a stronger one with a good Capital Adequacy Ratio position. The aspect of debt market restructuring comes up in such context. On this score the Union Budgets paid special attention in as much as attempts have been made to solidify the bond market liquidity and turning it to be more broad-based as well as competitive in nature. The market for securitised products has also been coming up. It is heartening to see that renewed efforts are on to make it a vibrant one.
The steps, which would be taken, however, must not overlook the various types of risks - the risks associated with trading in debt securities. The investor should be well aware of risks associated with the debt markets e.g. default risk, price risk, interest rate risk, and the re-investment risk. Investors in the debt markets should follow a process of judicious investing after a careful study of the economic and money market condition, various instruments available for investment, the desired returns and its compatibility with existing investment opportunities, alternative modes available for investments and the relevant transaction costs.
Next, operational aspects that could well come into such a context includes, among others, how mobilisation of funds could be brought about in a market driven rather than administered manner - removal of restrictive allocation norms applicable for the qualified institutional investors; fiscal stimuli for attracting small savings section, setting up an institutional infrastructure - of course inculcating an orientation towards risk management and marketing of debt products. In such context other intricately related areas like securitisation process as well as integration of the domestic debt market with the forex market vitally come to the fore.
To enhance debt culture in India the crucial need is there to develop a vibrant debt market especially for developing the primary market. Accelerating reforms in the primary as well as the secondary markets is the need of the hour simultaneously with sorting out the legal issues backed by following application of appropriate risk management techniques
If the bond market is targeted to grow exponentially a better look is required on vital aspects like: the resources needed for infrastructure development and that of mutual fund sector, new pension scheme, among others. Developing market for securitised products, appropriate assets-liability management on the part of the banks and financial institutions are the other segments required for ensuring a vibrant future for India's Corporate Debts Market. The need is also there to create more awareness on this score as the scope is wide open - individual investors as well as groups or corporate partners may participate in a debt market depending on the regulations imposed by governments.  
Some organisation rightly opined that 'three important policy challenges that remain are: improve market liquidity of the new markets; encourage greater private sector issuance; and spread the risks of bond investment more widely'. Finally, OECD's view is very important "…..the development of a well functioning government bond market will often proceed, and very much facilitate, the development of a private-sector corporate bond market".
It is better to remember that the ongoing trends will have impact on the retail debt market in India in the near future. The main investor segments in the retail debt market are:  Mutual Funds; Provident Funds;  Pension Funds Private Trusts; Religious Trusts and charitable organisations; Co-operative Banks; Housing Finance Companies; Non-Banking Financial Companies and Residuary Non-Banking Financial Companies; Corporate Treasuries; Hindu-Undivided Families and of course Individual Investors.
The Bombay Stock Exchange vision for the Indian Debt Market foresees 'the markets growing by leaps and bounds in the near future, soon attaining global standards of safety, efficiency and transparency'. This will truly help the Indian capital markets to attain a place of pride among the leading capital markets of the world. The Retail Debt Market is set to grow tremendously in India with the broadening of the market participation and the availability of a wide range of debt securities for retail trading through the exchanges.
This platform could enable trading in a wide range of government and non-government debt securities - introduction of new instruments like Separate Trading of Registered Interest and Principal Securities (STRIPS), Government Securities, securitised paper, etc; development of the secondary market in corporate debt; stress on interest rate derivatives based on a wide range of underlying in the Indian debt and money markets; accelerating development of the secondary repo markets.
Dr B K Mukhopadhyay, a management economist, is Principal, International Institute of Management Sciences, Kolkata, India.
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