Bond market is set for a take-off

Bond investments are now just a click away with entire transactions completed in five minutes.

By Vishal Goenka

India's financial markets are in the midst of a transformation powered by robust economic growth and credit demand. Faced with tightened bank lending and a need for flexible capital, NBFCs have been forced to rethink how they fund their growth. Banks, on the other hand, saw their Credit/Deposit ratio rising to 79.7 percent for FY 23-24, which requires new avenues of capital raising. The answer? A shift to the underpenetrated yet gigantic $2.6 trillion debt market, where Non-Convertible Debentures (NCDs) are emerging as the preferred tool for securing funding.

To provide some context, a total of 45 NCD public issues were done by 25 issuers raising Rs 19,167 crores (2.08x growth year-on-year) in FY 2023-24.

For all companies, diversifying their source of capital is always essential to weather economic cycles. It is important to highlight reasons for this shift towards bond issuance, apart from tightening lending norms.

The growth of private credit

NCDs issued in private format offer a way to raise long-term funds without the constraints of traditional banking limits. As regulations tighten, NBFCs have found new access to capital from AIFs (Alternative Investment Funds) and offshore investors focused on India. Private credit allows them to negotiate mutually beneficial terms whereby traditional institutional capital providers like insurance companies, mutual and pension funds may be restricted due to regulatory frameworks.

The rise of retail investors

This shift towards NCDs has also been facilitated by the advent of Online Bond Platform Providers (OBPPs), which have democratized access to the bond market. Working under SEBI framework, access to bond investment has been made easy for retail investors. These platforms provide detailed information on bonds as well as invest in building awareness for the product. Tapping this latent retail capital has given access to many NBFCs of late.

With innovative technology enabling a ‘24/7’ market, bond investments are now just a click away with entire transactions completed in five minutes. Furthermore, products such as Bond Calculators, Bond Portfolio Analytics and BondCase, are arming an entire investment generation with tools to make bond investment a necessary part of their portfolio.

The global focus on Indian fixed income

With the inclusion of Indian fixed income in global indices such as those of JP Morgan, Bloomberg, FTSE Russell – the demand of bond products is on the rise. It is natural for global investors to start with government bonds and move down the credit curve to corporations. In the times to come, this investor class will continue to be an important player. As the government yield curve remains firm and stable, it is easier for companies to issue bonds as a spread over the stable risk-free curve.

NCD issuances: Catalyzing economic growth

The surge in debt issuances is not about meeting the immediate capital requirements of NBFCs and corporations but has far-reaching implications for India's broader economic expansion. A more prosperous and liquid debt market allows companies to access capital more efficiently, enabling them to invest in growth initiatives crucial for the country's long-term economic prosperity.

A case in point - large infrastructure projects, which require enormous amounts of long-term financing, are looking at the bond market for funding. As India progresses towards a $5 trillion economy, the role of the bond market—especially NCDs—will be critical in supporting this growth trajectory. Hence, we see banks issuing large tranches of infrastructure bonds of late to fund projects.

Challenges and opportunities

Rising NCD issuances give us multiple opportunities, but there are inherent challenges that need to be addressed by players in the debt space. One big challenge that needs to be tackled is category awareness. Much is required on the front of education for new investors to emerge.

Another key challenge in the NCD market is liquidity in the secondary market. This is pertaining to market structure where three different venues of – RFQ, OTC, and Capital Markets segment – are available for corporate bond transactions which dissipates liquidity.

The future of NCDs

As we tackle challenges like category awareness and liquidity through educational initiatives and regulatory innovations like SEBI’s Liquidity Window, we pave the way for NCDs to play a defining role in India's financial future. These efforts will not only enhance current market conditions but also ensure that the bond market remains a robust and dynamic engine of growth as India progresses towards becoming a $7-8 trillion economy.

(Vishal Goenka is Co-Founder of IndiaBonds.com.)

Views are personal and do not represent the stand of this publication.