The Indian government will make it compulsory for corporates working on certain projects, particularly infrastructure-focused projects, to issue bonds according to an official from the Reserve Bank of India.
Power, irrigation and communications infrastructure such as roads, ports and railways are key sectors understood to be in need of investment within the country.
The news comes as India’s economy continues to grow. GDP accelerated to 7.9% in Q42015 from 7.2% in Q3 of the same financial year.
CRISIL, a research branch of S&P Global Ratings, estimates that India will need US$650bn of infrastructure investment between now and 2020.
The move is driven by two factors. First, the need to develop the country’s corporate bond market which has struggled to establish itself; and second, to reduce corporate reliance on India’s banking sector. The corporate space has previously favoured external commercial borrowing and bank loans as a method of financing.
The funding provided by the country’s financial sector has boosted infrastructure investment and corporate growth. The amount of investment in infrastructure spending is expected to double this year, which would further increase pressure on the sector and tighten banks’ lending capabilities.
Joiel Akilan, Executive Director and Chief Representative – India at BBVA said that well managed corporates are still able to borrow at competitive rates from Indian banks.
Although banks may be pressured to lend, Akilan said many Indian corporates themselves face problems which would prevent them from borrowing.
“It's the stressed companies that are in trouble. We have seen such companies either selling assets or considering selling their non-core assets to repay the banking sector.”
Despite the possibility of weak corporate borrowing further eroding the strength of the sector, the banking system is protected somewhat against non-performing loans (NPLs).
“Banks have mechanisms such as SDR (special debt restructuring), CDR (corporate debt restructuring) and a JLF (joint lenders forum) to take a corrective action plan so that stressed assets don't become NPLs.”
Nevertheless, lending is likely to tighten. Akilan noted that the Indian central bank found that many banks had not classified some stressed assets properly, meaning many entities had to reclassify and accommodate the stressed loans, which led to many banks reporting huge losses this quarter.
“This will definitely make banks scrutinise loan applications with magnifying glasses and hence only good companies will be able to access credit easily whilst for others it will be quite challenging.”