IT may not exactly set Dalal Street on fire, but on September 5, when the Bombay Stock Exchange On-Line Trading System (BOLT) starts dealing in 700 debt securities, it will herald a new age of retail debt trading in the country.
With mega bond offerings every week, retail debt is an idea whose time has come. Says S.D. Kulkarni, CEO, Larsen & Toubro, which launched its Rs 500-crore Value Bonds this fortnight: "With the equity market down in the dumps and the public mopping up bond issues, we felt that raising debt for our cement plant made sense." IDBI, ICICI, IFCI and SCICI have together collected over Rs 4,000 crore over the past few months. Another Rs 2,000-crore issue from IDBI and a Rs 500-crore issue from Tisco are in the offing.
But the most urgent reason why India needs a thriving debt market is the infrastructure sector, which requires to raise massive funds to meet demand and upgrade. Infrastructure financing is mostly through debt, since the projects are long-gestation and often high-risk. Without a vibrant debt market, the country's power, telecom, roads situations are unlikely to improve.
Though the potential is great, the growth of the bond market has been hampered by low liquidity of the instruments: in India, bonds can't be traded freely like shares. Says Lester Pereira, director-treasury, Barclays Bank Plc: "What has failed to take off is a dynamic secondary market in debt issues." The Indian bond market ranks third in Asia in volume, after Japan and Korea, with outstanding value at over Rs 3 lakh crore, or 42 per cent of the GDP at the end of 1995. "It's also possibly the most illiquid of markets," adds Shitin Desai, vice-chairman of DSP Financial Consultants which raised most of the domestic debt last year. The bulk of the 1,500-odd listed bonds and debentures (face value: Rs 20,000 crore) is illiquid.
Globally, debt is issued on a floating rate basis. At home, interest rates are fixed, making "the timing of an issue more important than the creditworthiness of the borrower," explains Pereira. The largest issuer is the Government, mostly through its 91-day or 364-day Treasury bills or securities with a maturity of 10, 20 or 30 years, and even sovereign guarantee loans and FI loans guaranteed by the Centre. All have fixed interest rates of 9-12 per cent, and fixed-rate bonds are unlikely to be traded much.
Why can't India have floating rate bonds, the mainstay of debt trading? Says Desai: "How can one issue floating rate bonds when there is no reference rate of interest?" Also called the benchmark rate, this is best illustrated by the London Inter Bank Offered Rate (LIBOR), announced at 11 am everyday by the Bank of England in consultation with a few leading banks of the UK. Pereira suggests the RBI could similarly fix a MIBOR (Mumbai Inter Bank Offered Rate). "With a credible reference rate, floating rate debt could be issued at a spread over MIBOR, which would be a function of the creditworthiness of the borrower," he adds.
That's a herculean task. The creation of a benchmark rate needs some structural changes. First, the removal of liquidity reserve requirements on inter-bank term borrowings, allowing swap between banks with surplus funds and those in deficit. A two-way market would then develop and a reference rate for each tenor would emerge, says Pereira. "A spin-off would be the development of a market for currency and interest rate derivatives." Also possible are swap operations between fixed rate and floating rate instruments. But banks need complete autonomy before they can demand waiver of SLR and CRR.
The second is a centralised depository for debt instruments and the third allows a ready forward facility on debt instruments. In developed markets, ready forward agreements (repos) are over 200 per cent of outright transactions, compared with a measly two per cent in India. Says R.H. Patil, NSE managing director: "Repos are done in desperation. It is not yet treated as normal trading practice."
M.G. Damani, BSE president, is upbeat though. Rival NSE has a wholesale debt market, but retail is a first with BSE. Says he: "The lack of depth ought to change now. Small broking houses hit by low interest levels in equities may well find debt a sound platform to return on." BSE will list debt under a new category, F (fixed income), with a Thursday-to-Wednesday trading cycle. And try to inject life into a Rs 30,000-crore plus dormant market.
