[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
structure financing which involves long
term loans. A well-functioning corporate
bond market allows firms to tailor
their asset and liability profiles and
hence allows them to raise long-term
funds to invest in ventures that have a
long-term payoff.
• Reduced fund costs – The corporate
may borrow directly from the investors
eliminating the intermediaries like
banks which will reduce their overall
cost of funds.
The Financial System
• The net interest margin of Indian banks
has increased from about 225 basis points
to 400 basis points during the last 10 years
leading to a high cost of commercial borrowing.
The high cost of commercial borrowing
has prompted the big corporate
to borrow from overseas markets however
smaller companies are bound to borrow
at high rates from the banks. The
high cost of borrowing is also evident
from low credit-deposit ratio of Indian
banks which is a almost 50 percent to that
Credit-Deposit Ratio Of Indian Banks
140
120
100
80
60
40
20
0
130
114
101
92 90
83 81 80 79
61 61
53
China
UK
Source -RBI & McKinsey
Malaysia
US
Korea
Thailand
Japan
Brazil
Singapore
India
Czech Rep
Turkey
of China. The corporate bond market can rating agencies, a wide range of corporate
exert a competitive pressure on commercial
banks in the matter of lending to priing
sophisticated credit analysis, an op-
debt securities and derivatives demandvate
business and thus help improve the portunity to make private placements,
efficiency of the capital market as a whole. and efficient procedures for corporate.
A well developed corporate bond market
would lead to a reduction in the systemic Investors
risk and probability of crisis. This is because
the presence of such an environ-
is also essential for the investors because
A well developed corporate bond market
ment is associated with greater accounting
transparency, a large community of safe way of investment but also helps
it not only provides them an alternate and
professional financial analysts, respected them diversify their risks.
Leading Rates In India
SOURCE - RBI
Average5 Year
Deposit Rates Average
Lending
Rates
Spread(%)
1997-98 11.75 14.00 2.25
1998-99 11.00 12.50 1.50
1999-00 10.25 12.25 2.00
2000-01 9.75 11.50 1.75
2001-02 8.25 11.50 3.25
2002-03 5.88 11.13 5.25
2003-04 5.38 10.63 5.25
2004-05 6.00 10.50 4.50
2005-06 6.63 10.50 3.88
2006-07 7.25 11.25 4.00
Developing The Corporate Bond
Market
Increasing Market Participation
By Widening The Investor Base
Banks – At present, banks’ loan portfolios
are not treated at par with their investment
portfolio. The investment
portfolio (banks’ investments in corporate
bonds) has to be marked to market
where as the same constraint is not there
in the case of a loan extended to the same
corporate. Hence there is incentive for
the bank to extend loans to the corporate
instead of investing in corporate bonds.
Banks’ investments in corporate bonds
need to be encouraged especially by
THE INDIA ECONOMY REVIEW
135