Market reforms encouraging securitization and corporate bond markets in India

Written by Anshuman Jaswal || June 14 2017

Government reforms have had contrasting effect on the securitization and corporate debt markets in India. Significant issues such as the high level of bad loans at public sector banks, bankruptcy laws which were not conducive to recovery of non-performing assets (NPAs), securitization of debt and the need to boost the corporate debt market, go hand in hand in India.

While there has been ongoing progress in the last few years, for many industry participants and observers, it has been slow and arduous. As a result, there is widespread dissatisfaction with the efforts to control the damaging effect of bad debt on the Indian economy. Against this background, there have been several reforms and changes in the last couple of years that are aimed at addressing these concerns.

The Insolvency and Bankruptcy Code 2016, which was approved by the Parliament last year, is part of the government’s reforms in this context. It will help public and private sector banks recover funds that are lost when their clients default on loans or become bankrupt. Under the previous laws, the possibility of such a recovery was quite remote. Another important reform is the Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act. This law has amended some related laws including the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002 and the Recovery of Debts due to Banks and Financial Institutions Act of 1993. This amendment will also make it easier for banks to recover their funds in case of insolvency of part of the client.

As mentioned above, such reforms are also related to the loan securitization and corporate debt markets. Historically, Indian firms have depended on the equity markets and bank loans for raising their funds. There have been several efforts to encourage the corporate debt markets but these have not been successful. Now the government and the central bank have decided to use recent reforms and industry cooperation to encourage both the corporate debt markets and loan securitization. Notably for securitization, the new policy allows for foreign players to participate in the sector.

A tax had been imposed on the securitization market earlier and that has also been removed now. These changes have encouraged the market and the volumes have grown in 2017, and are expected to continue to rise further. The growth in loan securitization will allow non-bank financial companies (NBFCs) to sell their loan portfolios to banks, thereby releasing more funds to then loan to their clients and prospects. Hence, vital funding will be released into the economy because of the recent changes.  The entry of foreign players will also strengthen the market, as the public sector players are already constrained in their market participation due to a higher level of NPAs.

The boost to the securitization market should indirectly also encourage the corporate bond markets, which will benefit from some of the insolvency and bankruptcy related reforms of the government. However, unlike loan securitization volumes, the corporate debt market is seeing slower response to recent reforms that include the introduction of an electronic dealing platform for repos in corporate bonds as well as the legal reforms to allow corporate bonds to be included in the central bank Reserve Bank of India's liquidity adjustment facility. Part of the problem might be a capital market culture that usually focuses less on corporate bonds as a means of raising funds. Nevertheless, over time the corporate bond market is also expected to follow the positive direction taken by securitization volumes and benefit from recent reforms.