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.