Suspense grows over the next leg of financial reforms
₹47.3 trillion of bonds outstanding as of March 2024, the corporate bond market enjoys less than 20% share of the wider bond market. With government issuances continuing to dominate, a tentative corporate bond market directly impacts private sector’s propensity for investment.
In addition, skews within the corporate bond market, with finance and non-manufacturing companies accounting for a bulk of issuances, complicate matters. And though the government and regulators have been chipping away at the existing legal and regulatory framework to impart more dynamism to the market, there remain some significant unresolved issues.
For example, poor recovery rates and prolonged recovery processes in cases of defaults are a clear impediment. The problem of unreliable credit ratings, the lack of updated borrower information or conflicts of interest inherent in the “issuer pays" model continue to linger.
As rules and regulation tighten at a glacial pace, borrowers and credit dispensers are finding new ways to get around the guard-rails. This shines a light on what could be the second pillar for reforms in the financial sector: wide open spaces for regulatory arbitrage.
While market operators have always tried to wring surplus profits by exploiting regulatory gaps—the past example of unit-linked insurance products is instructive—recent attempts to use credit products to leverage the cracks between different regulatory agencies pose serious risks to the broader financial system. Reserve Bank of India (RBI) governor Shaktikanta Das recently drew attention to the phenomenon of private credit markets: “While these markets may carry economic benefits by providing a greater pool of financing outside of the regulated financial markets and
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