Between March 2016 and 2018, corporate bonds outstanding increased 1.36 times. But, there are miles to go in terms of footprint on the economy. At less than a fifth of its $2.4 trillion gross domestic product (GDP), India’s corporate bonds outstanding hardly registers on the global radar. The domestic corporate bond market has done fairly well, fuelled by higher demand as a larger share of financial savings get channeled into the capital market, and favorable supply conditions have emerged because of mounting pressure of NPAs at banks. If India is to see rapid economic growth the corporate bond market will have to play a pivotal role.
Over the 5 fiscals through 2023, CRISIL expects corporate bond outstanding to more than double to `5560 trillion, compared with `27 trillion at the end of fiscal 2018. However, demand is expected to be only for `52-56 trillion, driven by higher penetration of mutual funds and insurance products, increasing retirement subscriptions, growth in corporate investments, and increasing wealth of HNIs. As a result, there would be a substantial gap of `3-4 trillion between demand and supply of corporate bonds in the next 5 fiscals.
Bank issuances @ `1.5-2 tn
CRISIL expects overall credit growth for banks at 13-14% between fiscals 2019 and 2023. While the availability of bank credit will improve, the focus is expected to shift to retail lending, limiting the funds available for corporates, especially in the infrastructure segment.
For public sector banks, growth will be muted in the near term, given their constrained ability to lend. A sharp fall in profitability has diminished capital generation from internal accruals, while weak performance has impaired their ability to raise capital from external sources.
Private sector banks are expected to capitalize on the opportunity and report very strong growth of 21% CAGR over the next 5 years, given the resolution of stressed assets problem and limited competition. CRISIL estimates overall capital requirement of `4 tn, of which `1.5-2 trillion is expected to be funded from the bond market.
Regulation spuR issuances
Issuances because of regulatory push are seen at `3-4 trillion. If the banking system’s lending to specified borrowers exceeds the ‘normally permitted lending limit’ or NPLL, banks have to apply higher provisions and risk weights to their exposure beyond the NPLL, leading to higher borrowing costs. This would push corporates to raise more funds from the capital market.
Besides, AA and above category listed corporates with long term borrowings of `1 bn or more have to raise 25% of their incremental long-term borrowings for a year through corporate bonds. These measures are expected to result in additional issuances of `1.5-2 trillion over the next 5 years.
A gap between the push from SEBI and RBI to the corporate bond market, can spur issuances of `2 trillion. The recovery process under IBC is expected to stabilize, which can deepen Indian bond markets beyond the AA category, towards A Category.
inFRa issuances at `8-9 tn
CRISIL estimates total infrastructure capex of `55.2 trillion in the next 5 fiscals, up 48% over the `37.2 trillion made in the 5 years through fiscal 2018. The top 5 sectors – roads, power (generation, transmission & distribution), railways, irrigation, and urban infrastructure – would account for 90% of the total spend.
Given the significance and nature of the projects, government spending in these sectors is expected to be quite high.
CRISIL expects 30% debt funding, of which `6-7 trillion would come from the bond market – the primary issuers in this space being entities such as NHAI and NTPC. Once the recovery process under IBC stabilizes, CRISIL believes there is a high probability of improved investor confidence in infrastructure bonds. As such, completed infrastructure projects, especially in the roads and renewables sectors, are likely to enjoy high recovery levels in the event of a default. This can help deepen the Indian bond market beyond the AA category. The successful implementation of IBC can potentially add another Rs2-3 trillion. Overall, CRISIL expects the infrastructure space to incrementally supply `8-9 trillion of bonds.
Major capital-intensive non-infra sectors such as steel, cement, oil and gas upstream, and auto will require `10 trillion capex in the next 5 years. Besides, sectors such as real estate, pharma, retail, FMCG, and holding companies will also raise money through bonds. Considering all these, CRISIL estimates additional issuance of `2.5-3.5 trillion from non-infra corporates over the next 5 years.
non-Banks’ issuance: `15 tn
The non-banks (NBFCs & HFCs) have gained share in the overall credit pie, even as banks have faced asset quality challenges.
CRISIL expects assets under management (AUM) of non-banks to log 13-15% CAGR over five years through fiscal 2023, compared with 15% in the previous five years.
To achieve this growth, non-banks will require capital of `30-33 trillion, of which `13-15 trillion would be through the bond market. Despite lower investor confidence of late, CRISIL expects volumes to remain healthy over the long term.