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CredAvenue: Bonding retail investors to Debt Markets

Retail investors in India have largely eschewed bonds as a result of limited access and information, liquidity concerns and other barriers to investment. With Indian bond markets predicted to touch new highs, can technology disruptions bring retail investors in?

February 25, 2022 / 03:33 PM IST

If the Union Budget 2022 had a headline, it was the massive increase in govt spending on capex for Infrastructure. Finance Minister Nirmala Sitharaman talked of the multiplier effect of such expenditure (₹2.95 to the rupee) vs that of revenue expenditure (₹0.95 to the rupee).

For sustainable growth of an economy a deep and liquid bond market is essential. India’s funding needs are for rapid expansion, capital expenditures, mergers and acquisitions: all require a deep, vibrant debt market that takes the pressure off an overburdened banking system. Think about it: aside from the top tier, most businesses don't have access to equity funding, and when they turn to debt, they run up against an overburdened banking system.

This isn't just a problem for corporate India. The government too, needs to borrow for financing public institutions, welfare activities and capital expenditure when the tax collections are not enough to finance these. At the end of FY2021, the government borrowing stood at 60.5% of the GDP, in no small part due to all the expenditure on relief measures necessitated by the Covid-19 pandemic. Where do governments turn to, to finance their debt?

One way is to issue dollar bonds, which can be a risky proposition as it involves borrowing in foreign currency. Another alternative is to find a way to channel the massive savings of a growing country to finance public debt. And that is exactly what the Indian government is trying to do, by making it simple for retail investors to invest in government bonds directly.

RBI Retail Direct Platform

In November 2021, the government launched the RBI Retail Direct Platform that allows ordinary people like the writer and readers of this article to invest in Government Securities. The platform allows investment in Government of India Treasury Bills, Government of India dated securities, Sovereign Gold Bonds (SGB), and State Development Loans (SDLs). The registration process is dead simple - register with your details on the RBI Direct portal, and then complete the online KYC process. Once processing is completed, the portal sends you your credentials.

Efforts have been made to simplify the investment process too - especially for the primary market which was previously off limits for retail investors. Secondary market transactions happen through the NSD-OM. The government hopes that simple, easy and transparent processes can lead to quicker adoption of services and scale up the program quickly.

And that is precisely where the problem lies.

Do Retail Investors Understand Bond Markets? 

India is home to almost one-fifth of the world population and has a literacy rate of nearly 80%. Unfortunately, only 24% of people in the country are financially literate. For most Indian investors, Debt Markets just aren't familiar enough. In fact, for most retail investors, the holy trinity of investments are mutual funds, equity and fixed deposits. In fact, when it comes to fixed income products, the Indian investor is spoiled for choices, but they don't know it.

The government's bouquet of offerings consists of PPF, VPF, Senior Citizen's Saving Schemes (limited to those over 60 years of age), Sukanya Samriddhi (limited to investments for girl children), and listed PSU bonds. Other fixed income investments include money market funds, Company Deposit, Certificate of Deposit, and bond funds. The ironic thing is, these investment vehicles suit the conservative Indian investor far more than equity products do because of their predictable incomes, and (generally) lower risk profiles.

Due to low investor education on debt markets generally and bond markets specifically, the Indian corporate bond market is dominated by a few institutional investors and professional fund managers. The opportunity however, is immense. The total bank credit to corporate is about 63 lakh crore as on 31st March 2017, essentially, corporate India borrows 2.7 times more from banks than from debt markets. According to Crisil, the outstanding corporate bond market in India is expected to double and reach ₹65-70 lakh crore by 2025.

Can Indian Bond Markets Increase Penetration Among Retail Investors? 

Yes, they can, provided certain barriers to entry are bypassed. As we established earlier, most retail investors lack education on bonds. Investor education is critical. But even when investors understand bond markets and debt products, they need access to data in a way that allows them to compare, analyze and choose products that fit in with their investment goals and strategies. In much the same way that equity markets benefited from digitisation, the opportunity exists in debt markets today. Another deterrent for investment has been the lack of liquidity in unknown bonds from time to time. For liquidity to improve, bond markets need increased penetration. The market for all sorts of investors, with varying risk appetites and investment strategies, exists. The need of the hour is a solution that brings them together in one place, to create both liquidity and price discovery.

CredAvenue, an Indian startup whose stated aspiration is to create GDP multipliers in the Indian economy by unlocking credit, might just have the perfect solution. CredAvenue's fixed income investments platform, is slated to launch by June 2022 and is currently available by invite only. With this, the organization aims at creating a culture of investment by not only addressing all barriers to entry but also creating ease of use.

CredAvenue's Fixed Income Platform comes equipped with seamless self onboarding, and creates uninterrupted transaction journeys. It helps new investors find their feet in the bonds market through a learning management system, and provides additional analytics and insights for more seasoned investors. The platform parameterises all data needed for investors to evaluate their investment options, while also creating synergies through inventory, lead and portfolio management for sellers, agents and investors. Price discovery is built in, as is transparency. Additionally, the platform will aim to make bond investments more accessible to the retail investor by lowering the investment threshold to just Rs10,000.

What Does This Mean For India Inc? 

The opportunity is huge for investors and businesses alike. As of December 2020, India's corporate debt stood at just 18.2% of the GDP. Flourishing economies like the US, South Korea and Malaysia, boast of much higher penetrations at 123.47%, 74.3% and 44.5% respectively. Structurally, the debt market remains skewed towards G-secs (Rs 115.87 lakh crores compared to corporate bonds of just 35.87 lakh crores).

Retail investment into G-secs allows the everyman to invest directly into the country's growth, while earning decent ROIs. Retail investment into corporate bonds unlocks capital for businesses to grow with, while creating avenues for retail investors to diversify their portfolios, while reducing financial sector fragility. It's a win-win, and a win.

Moneycontrol journalists were not involved in the creation of the article.

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Tags: #Features
first published: Feb 24, 2022 03:12 pm
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