The Indian infrastructure sector has undergone a turnaround over the past few years. The increased focus on infrastructure development and the introduction of government programmes such as the National Monetisation Pipeline (NMP) have led to not only an increase in funding opportunities but also the emergence of various funding avenues, a key financing instrument being bonds.
The Indian bond market has grown 3.5 times from Rs 12.9 trillion in 2013 to Rs 45 trillion in 2023. As per CRISIL Research, it is projected to grow 2.2-2.5 times in the next five to six years to Rs 100 trillion-Rs 120 trillion. Additionally, with plans under the NMP to recycle around Rs 6 trillion worth of government infrastructure assets by 2025, many of these assets are expected to present an investment opportunity for the bond market.
The Indian bond market currently has a low level of penetration compared to other Asian countries such as South Korea (86 per cent), Malaysia (54 per cent) and Hong Kong (42 per cent). However, the Indian market stands out among its peers due to factors such as presence of a high number of financial sector issuers, predominance of the private placement market, and the fact that a substantial proportion of bond investors are mutual funds and insurance companies (57 per cent).
Trends and developments
During 2022-23, as per CRISIL Research, the total bond issuances witnessed a year-on-year increase of around 37 per cent to touch Rs 8.3 trillion, the highest in the past seven years. The increase in issuances was due to a pick-up in the post pandemic economic activity and other redemptions which prompted the government to increase its borrowings.
While the issuances were largely driven by banks and state-run companies in 2022-23, infrastructure companies focusing on sectors such as renewable energy, power, and cement are expected to tap the bond market in 2023-24.
Housing finance corporations (HFCs) and non-banking finance corporations (NBFCs) have been the leading issuers in the bond market, with the private sector following closely after. The Reserve Bank of India’s (RBI) move to allow partial credit enhancement (PCE) of bonds issued by NBFCs and HFCs has enhanced their liquidity position, making these bonds all the more lucrative.
In line with this, financial institutions are also continuing to fuel the growth of corporate bond markets. However, bond issuances by public sector undertakings (PSUs) and state-level PSUs have remained less than 10 per cent in the past five years.
The infrastructure sector has accounted for approximately 15 per cent of the overall bond issuances in recent years. Issuers typically seek investments with specific characteristics such as a long tenor, a favourable risk profile, a decent yield, and promising recovery prospects. Infrastructure bonds have primarily been issued by PSUs.
Key recommendations
Currently, the utilisation of the foreign portfolio investment (FPI) limit in Indian corporate bonds is at its lowest point. Streamlining the voluntary retention route, which involves determining the committed portfolio size and lowering the cap of 50 per cent for each allotment for an individual FPI, could facilitate the flow of foreign capital into the corporate bond market.
The existing credit guarantee system is restricted to firms such as India Infrastructure Finance Company Limited (IIFCL), which offers a significantly insufficient coverage of only Rs 2.5 billion per year. A new credit enhancement NBFC must be established to offer guarantees, backed by a significant authorised capital. This would help attract long-term investors such as domestic pension funds and insurance firms.
In 2022, the RBI amended the prudential guidelines on bilateral netting of qualified financial contracts. In line with this, a credit default swap (CDS) market could be developed by allowing more market participants. This might potentially stimulate the interest of bond market investors in issuers with lower credit ratings, and offer them hedging options to enhance their confidence in bond market investments across the ratings spectrum.
Pension funds are allowed to invest in corporate bonds which have a minimum of “A” rating or equivalent in the applicable rating scale subject to the condition that the investment between “A” and “AA-” rated bonds is made to the extent of 10 per cent of the overall corporate bond portfolio. There is a need to alleviate investment restrictions on corporate bonds rated below “AA” specifically for insurance and pension funds. This would increase the market share of the “AA” rated category in the bond market.
Growth prospects
As per CRISIL Research, there is an expected increase in capital expenditure (capex) of approximately Rs 110 trillion during the period of 2022-23 to 2026-27. This projected amount is approximately 1.7 times higher than the capex observed in the preceding five-year period. Furthermore, the projected budget allocation trajectory indicates a consistent growth trend. Additionally, retail credit expansion is projected to continue its momentum, bolstered by the growth of private consumption and the formalisation of last-mile credit flow.
During 2022-23, India’s retail credit market accounted for only 30 per cent of GDP; this is significantly less compared to the retail credit markets of developed nations. For instance, by end 2022, retail credit in the US accounted for 54 per cent of its GDP. Nevertheless, India is experiencing a growing trend of financialisation of savings, or a shift away from physical assets. Among financial assets, managed investments have achieved a CAGR of 16 per cent in the past five years, while bank deposits have achieved a CAGR of 10 per cent.
The bond market can be utilised to bridge the funding shortfall in the National Infrastructure Pipeline (NIP). The union budget accounts for 42-46 per cent of the NIP funds, while banks contribute 8-10 per cent, infrastructure NBFCs lend 15-17 per cent, corporate bonds contribute 6-8 per cent, new development finance institutions contribute 2-3 per cent, asset monetisation provides 3-5 per cent, and other resources make up 7-8 per cent. Despite these contributions, there is still an estimated 8-10 per cent shortfall in financing, which can potentially be funded through the bond market.
Based on a presentation by Jagannarayan Padmanabhan, Senior Director and Global Head, Consulting, CRISIL, at a recent India Infrastructure conference
