14.26         ndian   onom
     rose further to 17.8 per cent in 2010–11. The bond    he cannot find a buyer. Hence, this may lead to
     market, on the other hand, has been miniscule in      discourage someone from buying the bonds in the
     comparison. The thinness of the bond market has       first place. If everybody reasons like this, the bond
     been somewhat compensated by foreign borrowing        market remains thin. Hence, the need is for a push
     done by Indians, which rose sharply over the          that nudges the market to another equilibrium,
     last decade. Further, India is characterised by a     where people readily buy bonds because they
     disproportionate amount of secured borrowing.         know that they can easily sell these off and this
     The small size of unsecured borrowing may, at         becomes a self-fulfilling prophesy and sustains the
     first sight, not seem to be a matter of concern, but  large bond market.
     it could be a reflection of the weakness of contract        There is effort currently on to try to boost
     enforcement and lack of adequate information. If      India’s debt and bond markets, and success in
     contracts were quickly enforced and lenders had       this can give another fillip to growth. With the
     information on borrowers, they would be more          intervention of the Patil Committee (2005)
     willing to give unsecured loans. This would give      recommendations, the corporate bond market is
     a nimbleness to the financial markets which they      slowly evolving. With bank finance drying up for
     presently lack.                                       long term infrastructure projects, in view of asset
           There are many reasons why bond markets are     liability problems faced by the banking system,
     important for an emerging economy. Prominent          the need for further development of a deep and
     among these is the fact that they lead to more        vibrant corporate bond market can hardly be
     efficient entrepreneurship and greater value          overemphasised. Recent initiatives for further
     creation. When an entrepreneur takes a loan or        development of corporate bond markets, taken in
     issues bonds, all additional profit over and above    the year 2012–13 are as given below :
     the pre-fixed repayment amount accrues to the               (i) Banks allowed to take limited membership
     entrepreneur. So he or she is better incentivised                in SEBI-approved stock exchanges for
     to take sharper decisions. By having a weak bond                 the purpose of undertaking proprietary
     market, we may be foregoing this efficiency. And                 transactions in the corporate bond
     further, this efficiency gap may well mean that                  markets.
     there is less lending and hence less investment and        (ii) To enhance liquidity in the corporate
     entrepreneurship in the economy than is feasible.                bond markets, the IRDA has permitted
     Further, as India tries to garner 500 billion dollars            insurance companies to participate in the
     from the private sector in the Twelfth Plan for                  repo market. The IRDA has also permitted
     investment in the infrastructure sector, having an               insurance companies to become users of
     active bond market would be a valuable avenue for                ‘credit default swap’ (CDS).
     raising money.
                                                               (iii) The minimum haircut16 (i.e., the
           There can be many reasons why, despite these               difference between prices at which a
     advantages, the bond market has not developed
     adequately. One reason has to do with what              16.    Haircut is the difference between prices at which a
                                                                    market maker can buy and sell a security. The term
     economists call ‘multiple equilibria’. Consider                comes from the fact that market makers can trade at
     a situation where the bond market is small. If                 such a thin spread. It also means that the percentage
     someone buys bonds and later wish to sell these                by which an asset’s market value is reduced for the
     off, he anticipates difficulty. Since the bond                 purpose of calculating capital requirement, margin and
                                                                    collateral. When they are used as collateral, securities
     market is not active, he may not easily be able to             will generally be devalued since a cushion is required
     sell the bonds and thus he will hold simply because            by the lending parties in case the market value falls.