India pushes biggest borrowers to rupee bond market
SINGAPORE: India’s central bank is to ask large borrowers to issue more bonds in an unprecedented move to deepen the domestic capital markets and address concentration risks in the banking system.
The Reserve Bank of India has proposed the measure as part of a discussion paper on rules limiting the exposure of banks to individual borrowers.
If enforced in their current form, the new regulations may require India’s large corporations to raise a certain percentage of their funding from rupee bonds, forcing many to change financing strategies.
“Large corporate borrowers enjoying term loan limits above a certain threshold from the banking system should necessarily meet a certain minimum extent of their term/project loan requirements from corporate bond market,” the RBI said.
Historically, India’s bigger business groups have enjoyed strong relationships with the country’s banks, giving them little incentive to issue domestic bonds.
However, the RBI wants to tighten single-borrower limits to 25 per cent of a bank’s Tier 1 capital from 55pc of combined T1 and Tier 2 under current rules, according to the discussion paper.
The limits will also be based on “economic interdependence” to the corporate group, an expansion from direct subsidiaries.
The proposals will bring Indian regulations in line with Basel III standards and are to be fully applicable from Jan 1, 2019. Banks can reduce exposure to individual borrowers, or increase their eligible capital base, or both. Market feedback on the proposals is due on April 30.
Alternative sources in tandem with the single-borrower limits, the RBI is promoting the use of rupee bonds and commercial paper as alternative sources of funding.
Requiring companies to sell bonds will add more liquidity to India’s shallow domestic bond market and lighten India Inc’s dependence on bank loans. Analysts warn, however, that there will be many practical challenges to spur more companies into the capital markets.
“The intention of the RBI to reduce concentration risk by diversifying to the bond markets is indeed good, but, this will mean Indian companies also have to be more disciplined as bond markets are more ruthless in judging credits”, said Ananda Bhoumik, senior director, India Ratings & Research.
State-owned borrowers dominate the rupee bond market, while India’s top private corporations rely more on either offshore debt or the local bank market.
Reliance Industries, Ind¬ia’s largest private-sector corporate borrower, has issued only one rupee bond in the last six years, raising Rs5bn of five-year money in Nov¬ember 2014 at 8.95pc, according to Thomson Reuters Eikon. Yet, the company has been fairly active in the offshore markets.
