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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.

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