Issuance of corporate bonds will benefit from RBI’s proposed norms: India Ratings

The proposed inclusion of corporate bonds will give a fillip to banks’ investment in corporate bonds, especially longer duration bonds.

The rating agency believes that there will be some major challenges in terms of allowing corporate bonds in HTM. First, HTM offers to market exclusions from the regular mark; Therefore, in case of poor credit quality, the notional loss may increase disproportionately.

As per the discussion paper, a loss test will need to be conducted on quarterly basis and if any loss is found, it will be debited to Profit and Loss (P&L) Account. India Ratings said that in order to avoid such an eventuality, certain rating restrictions need to be triggered to mark to market through a minimum rating threshold, and the latter requires alignment with market-based pricing.

Secondly, HTM for trading in corporate bonds will reduce the stock of corporate bonds, hence affecting the liquidity of the market, it said.

“Globally, the corporate bond market plays an important role in the financial system; a vibrant corporate bond market ensures better credit underwriting and efficient market mechanisms. Although market-based funding is more sensitive to capital market volatility, It doesn’t outweigh the benefits of a developed bond market.”

According to the rating agency, with the traditional lending landscape changing due to the fintech revolution, borrowers and investors are looking for more financing options in the capital markets. In such an environment, promoting banks’ incentives for corporate bonds is a welcome move.

Existing Indian norms only allow securities issued by the central government, state governments and certain infrastructure companies to be placed in the HTM category, which is up to 25% of the total investment. However, the new norms propose to include corporate bonds along with existing securities, which have been permitted within the HTM category with the removal of the 25% limit for this category. India Ratings said it expects this to increase the momentum of banks to invest in corporate bonds. Investors among corporates are largely focused on insurance and pension funds, followed by mutual funds.