Worst growth for India's corporate bonds in over 10 years fuels concern

There’s yet another sign that India’s push to quickly expand its corporate debt market is faltering, as borrowers turn more to banks already struggling with one of the world’s worst bad debt ratios.

India’s bond market remains small compared with other major economies, frustrating policy makers who champion it as a way of diffusing credit risks that have stacked up at banks.

While the amount of outstanding rupee corporate notes, excluding banks, has been expanding for years, the pace of growth has generally been slowing since 2017 and marked its lowest rate in over a decade in May at 9.7%, according to a Bloomberg Economics index.

In contrast, bank lending grew 12.7% in the twelve months through May 24, Reserve Bank of India data show.

Risks in India’s credit markets resurfaced earlier this month after a lender delayed bond interest payments, adding to worries for investors who have been on edge since infrastructure financier IL&FS Group defaulted for the first time last year.

“Demand for credit has shifted to banks from the bond market,” said Atanu Bagchi, chief financial officer at Can Fin Homes Ltd. “The trend of slow growth in outstanding corporate bonds is seen reversing only if regulators take specific measures to boost investor sentiment, which has been weak since last year.”

Bagchi expects gross bond sales to remain weak due to a slowdown in the economy and low capital expenditure requirements for companies.

India’s growth eased to a five-year low in the quarter ended March, and the central bank has cut interest rates three times this year.

That monetary easing may help push back against the trend of slowing bond market growth, some observers say. The rate cuts should translate into lower borrowing costs for the corporate sector, supporting economic activity and boosting credit demand in the months ahead, according to Bloomberg economist Abhishek Gupta.

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