Rakesh Mohan Deputy Governor Reserve Bank of India

1. Developing Corporate Debt Market in IndiaThe 3rd Invest India Debt Market Round TableMay 6, 2003 Rakesh Mohan Deputy Governor Reserve Bank of India

2. Structure of Presentation • Public Policy Benefits • Stylized Facts in Corporate Debt Market • Development of Corporate Debt market • Constraints • Pre-conditions • Wholesale Market • Retailing • Current Agenda for Debt Market Reforms

3. Public Policy Benefits • Contribution to Economic Development • Better intermediation between savers and investors • Avenues for long-term saving • Supply of long-term funds for investment • More efficient reallocation of capital • Flexibility in products • Diffuses risks on the banking system • Diversifies credit risk • Achieving 8 per cent growth rates in India needs : • Larger capital for productive purposes

4. Structure of Presentation • Public Policy Benefits • Stylized Facts in Corporate Debt Market • Development of Corporate Debt market • Constraints • Pre-conditions • Wholesale Market • Retailing • Current Agenda for Debt Market Reforms

5. Stylized Facts (1) • Household Saving Increased Steadily

6. Stylized Facts (2) • Shares of Instruments in Household Financial Savings • Preference towards bank deposits (Per cent)

7. Stylized Facts (3) • Sources of Funds for Corporate Sector • Lower reliance on borrowing and greater reliance on capital market (Per cent)

8. Stylized Facts (4) • Resources Raised from Domestic Debt Market - India • About one-third by corporates (including FIs/banks/PSUs/State undertakings / private corporates (Per cent)

9. Stylized Facts (5) • Resources Raised from Debt market : Emerging Markets End 2000 (Per cent)

10. Stylized Facts (6) • Total Corporate Debt in India • Mostly privately placed (Rs. Billion)

11. Stylized Facts (7) • Issuers in Private Placement Market • Dominated by banks, FIs, PSUs & state Govt. guaranteed instruments (Per cent)

12. Stylized Facts (8) • Secondary Market Turnover in Debt Segment of NSE • Dominated by dated Government Securities and T-Bills (Per cent)

13. Stylized Facts (9) • Retail Trade Insignificant (Per Cent)

14. Structure of Presentation • Public Policy Benefits • Stylized Facts in Corporate Debt Market • Development of Corporate Debt market • Constraints • Pre-conditions • Wholesale Market • Retailing • Current Agenda for Debt Market Reforms

15. Development of Corporate Debt Market (1) • Constraints (faced in general in developing economies) • Lack of good quality issuers • Lack of institutional investors • Lack of Supporting infrastructure • Legal • Regulatory • Technological • Preference of corporates to borrow • Cost of issuances high • Ease of renegotiation • Absence of anonymity • Fragmentation of market

16. Development of Corporate Debt Market (2) • Preconditions (1) • Well functioning Government Securities market • Benchmark issues (on-going) • Regulatory and legal Infrastructure (in place) • Technology (in process) • Clearing and settlement system (in place) • Efficient Money Market (on-going) • Effective transmission of monetary policy • Stability in interest rates • Public disclosures (on going) • To ensure public confidence • Proper accounting, auditing and disclosure rules

17. Development of Corporate Debt Market (3) • Preconditions (2) • Credit Rating System (exists) • To determine relative ability of borrower to repay • Bankruptcy Laws (need attention) • To define investors legal ability to enforce repayment • Avoid Public Sector Crowding out (no statutory constraint) • SLR investments • Availability of Hedging Instruments (on going) • OTC and Screen-based market for derivatives (in process)

18. Development of Corporate Debt Market (4) • Wholesale Market • How to make market more liquid • Reform in primary and secondary markets • Enhance disclosures • Rating standards • Accounting standards • Better interest rate risk management (issuers and investors) • Better ALM • Fungibility of corporate debt to increase size • Active consolidation • More frequent marked to market of portfolio • Use of technology

19. Development of Corporate Debt Market (5) • Retailing (1) • SEBI-NCAER Survey (1999) : only 13 million (Approx.) urban investors owned equity shares and / or debentures • 2001 Census : 27 cities with more than one million population • 2001 Census : 395 cities with more than 100,000 and less than 1 million population • The retail market is very wide

20. Development of Corporate Debt Market (6) • Retailing (2) • What the investor wants • Transparency • Confidence regarding repayment • Simplicity and convenience of dealing in the market • Technology • Lower costs of dealing in the market • Risk aversion • Ease of exiting market • Liquidity • Screen-based trading exists in Government Securities Market

21. Structure of Presentation • Public Policy Benefits • Stylized Facts in Corporate Debt Market • Development of Corporate Debt market • Constraints • Pre-conditions • Wholesale Market • Retailing • Current Agenda for Debt Market Reforms

22. Current Agenda for Debt Market Reforms • G-Sec Market • Swap of Illiquid Debt (active consolidation) • Further Development of Repo Market • Rollover of repos • Sale of Repoed Securities • Repo in Corporate Securities • Exchange-Based Derivatives Market • Market for STRIPS • When-Issued Market • RTGS

23. Conclusion • Ultimately, if we need to achieve 8 per cent growth : • Savings and investments have to increase • Funds have to be channeled to most efficient and productive uses • We need to develop the genuine corporate debt market • Both wholesale and retail segments need to be developed • RBI is developing the infrastructure in G-Sec market • An efficient retail market would reduce overall costs of intermediation in the economy • This Forum should come out with an operational agenda for reform in this segment • RBI would be happy to participate in this process with market participants and other regulators