e    rit     ar et in ndia        14.25
     or home loans. After an asset is converted into      the Indian equity market ranks among the
     a marketable security, it is sold to an investor     best in the world. In parallel, the government
     who then receives interest and principal out of      securities market has also evolved over the years
     the cash flow generated from servicing of the        and expanded, given the increasing borrowing
     loan. Financial institutions such as NBFCs and       requirements of the government. In contrast,
     microfinance companies convert their loans into      the corporate bond market has languished both
     marketable securities and sell them to investors.    in terms of market participation and structure.
     This helps them get liquid cash out of assets        NBCs are the main issuers and very small amounts
     that otherwise would be stuck on their balance       of finance are raised by companies directly. The
     sheets.                                              Economic Survey 2010–11, cites many reasons
          Global experience shows that if the value of    for the less-developed bond market in India—
     the underlying asset falls then securitised assets         (i) Predominance of banks loans;
     lose value as it had happened during the US               (ii) FII’s participation is limited;
     ‘sub-prime crisis’—home loans against which
                                                             (iii) Pensions and insurance companies
     securitised assets were sold to insurance companies
                                                                      and household are limited participants
     and banks lost value, which in turn resulted in a
                                                                      because of lack of investor confidence;
     crisis. To prevent such crises, the RBI has taken
     some precautionary steps in this regard. It has
     asked companies to hold securities for a certain         (iv) Crowding out by government bonds.
     minimum period:                                            The Economic Survey 2011–12 concluded15
          (i) While NBFCs need to keep assets for         that there is now ample empirical research to
              six months, a minimum retention             corroborate Schumpeter’s conjecture that financial
              requirement of 5–10 per cent to ensure      development facilitates real economic growth. The
              that they have a continuing stake in the    depth of the financial markets and availability of
              performance of securitised assets.          diverse products should, therefore, not be treated
         (ii) Micro Finance Institutions (MFIs) need      as mere adornment, but as critical ingredients of
              to hold them for three months.              inclusive growth.
          Since it was allowed in India by the RBI, it          Banks in India accounted for 14.4 per cent
     has been in news – whether the ‘securitisations      of the financing of large firms in 2000–01, which
     trusts’ will need to pay tax on it. Meanwhile, the     15.    Ministry of Finance, Economic Survey 2011–12 (New
     Government in 2015 cleared the air on the issue.              Delhi: Government of India, 2012), 34; quotes many
     There should not be any additional income-tax if              contemporary references to bring the point home –
     the income distributed by the trust is received by a          a). R. Rajan, and L. Zingales, ‘Financial Dependence
                                                                   and Growth,’ American Economic Review, vol. 88, 1998;
     person who is exempted from tax. This is expected             b). S. Banerji, K. Gangopadhyay, I. Patnaik, and A, Shah,
     to bring back mutual funds into the securitisation            ‘New Thinking on Corporate Debt in India’, mimeo.;
     market.                                                       c). C. K. G. Nair, 2012; ‘Financial Sector Reforms:
                                                                     efining the Architecture, in . alhotra ed. , A Critical
                                                                   Decade: Policies for India’s Development, (New Delhi:
        corPorate BonD in inDia                                    Oxford University Press, 2012) d). T. A. Bhavani, and N.
                                                                   R. Bhanumurthy, Financial Access in Post-Reform India;
     Economic vibrancy coupled with sophisticated                  e). P. Bolton, and X. Freixas, ‘How can Emerging Market
     state–of–the–art financial infrastructure has                   conomies enefit from a Corporate ond ar et , in .
                                                                   Borzenstein, K. Cowan, B. Eichengreen, and U. Panizza
     contributed to rapid growth in the equity market              (eds), Bond Markets in Latin America, (Massachusetts:
     in India. In terms of market features and depth,              MIT Press, 2008).