Global Journal of Finance and Management. ISSN 0975-6477 Volume 6, Number 8 (2014), pp. 749-756 © Research India Publications http://www.ripublication.com

Evaluation of Contribution of Debt Market in Indian Financial Market: An Empirical Study Dr. Ravindra Tripathi*, Ms. Lovely Srivastava** and Ms. Geetu Yadav*** *

Assistant Professor, ** Research Scholars (UGC-JRF) and *** Department of Humanities and Social Sciences Motilal Nehru National Institute of Technology Allahabad E-mail: [email protected], **[email protected], *** [email protected]

Abstract Indian Debt market is the financial market with two segment viz. the government securities market and corporate bond market, but the size of the latter is only about 14% of the total debt market. This is reflective of both, the relative recurrent fiscal deficits and the underdeveloped status of the corporate debt market. In spite of liberalization in stock market the share of debt market is still at bottom level when we compare it with equity market. Even in debt market the major portion is in the form of private placement. Purpose: This research paper aims the implication of debt market and its role in accelerating the development of economic growth in particular. The paper also identifies several weaknesses in the present system along with areas hindering the growth of debt market. Methodology: To analyze the efficiency and growth performance of the debt market we have used least square method will help to forecast the future growth. Findings: The main outcome of the study is very limited investment in debt securities as compared to investment in equities further we have derived that the projection trend of debt investment is not impressive in India till now and there is an urgent need to relook the matter by the government of India and regulatory authorities towards providing better infrastructure investors for investment in retail debt market. Research Limitations: The limitation of the study is that it is based on secondary data which were collected through NSE, Economic survey, RBI reports and finance journals covering 2002-12. JEL Classification: F65, H63 & H68

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Ms. Lovely Srivastava et al Keywords: Indian Debt Market, Government and Corporate Borrowings, Government and Corporate Securities, Whole Sale Debt Market

1. Introduction Financial Markets have several facets and are segregated into Capital and Money markets. Product based classification gives rise to segmentation of market into equity, debt, foreign exchange and futures. In many countries, debt market (both autonomous and corporate) is larger than equity markets. In fact, in full-grown economies debt market is three times the size of the equity market. Investment in equity being riskier, assured class of investors chooses to invest in debt, based on their risk craving and liquidity rations. In fact, most investors like to extend their investments into equity, debt and other classes of assets for reasons of best possible grouping of return, liquidity and security. A vibrant debt market enables investors to mix up, rearrange their portfolio depending upon the anticipated changes and provides financial resources for the development of infrastructure. A well operating debt market becomes momentous for all the market participants. The debt market has been accepted than the equity markets in developed economies but in India the reverse has been true. This has been due to the governance of the government securities in the debt market and that too, a market where government was borrowing at pre-announced coupon rates from basically a confined group of investors, such as banks. Thus there existed a passive internal debt management guiding principle. This, coupled with regular monetization of fiscal deficit disallowed a deep and exciting government securities market.

2. Indian Debt Market Debt market refers to the environment in which the issuance and trading of debt securities occurs. It primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations. The bond market in most of the countries tends to be larger than or at least similar to equity market in terms of size and activity. One of the main reasons for the exceptional growth in bond markets is the increasing globalization of investors’ portfolios. Since government is less cautious about allowing foreign investment in bonds as compared to equity of domestic companies, there has been a progressively more supply of bonds for international investors. In fact, one of the largest securities market in the world is a bond market, the Eurobond. Debt markets are important source of funds, especially in a developing economy like India. Indian debt market is one of the largest in Asia. Like all other countries, debt market in India is also considered a useful replacement to banking channels for finance.

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3. Literature Review The Indian capital market, for equity and corporate debt, also dates back to colonial period with the establishment of the first stock market in India in Bombay in 1857. During the colonial period, many Indian firms adopted debentures as a source of financing (Roy, 2000). In 1991, the pricing of new issues was freed from restrictions, along with relaxation of the restrictions on firms to approach the capital market for the funds. In 1992, the government allowed Indian firms with good track record to issue debentures in foreign capital markets. In the post 1991 period, there was some growth in the bond market with the introduction of many new and innovative types of bonds (Sen and Vaidya, 1997). In the presence of information asymmetry, banks and financial institutions are expected to be more effective in monitoring than the arm’slength lenders. As private debt holders are likely to be more informed through monitoring and screening, and private debt is usually senior to public debt in terms of repayment order (Welch, 1997), it would be safer than the arm’s-length debt. The literature, as applied to financial markets, has emphasized the advantage of monitored debt such as bank borrowing in reducing informational and monitoring costs as compared to effortlessly accessible debt (Rajan, 1992). In fact, this presence of bureaucratic lethargy in state-owned financial institutions has been noted in previous studies, which have found that countries with higher government ownership of banks are associated with lower financial development and lower growth of per capital income and productivity and that the lending behaviour of state-owned banks is politically determined (La porta, Lopez-de-Silanes and Shleifer, 2002; Sapienza, 2004)

4. Objectives of the Study The main objective of the study is to analyze the changing pattern of Indian debt market. The objectives of the study is to study performance of Govt. and Non-govt. securities during the period (2002-2012)

5. Methodology Period of study-The study covers period of 10 years from 2002 to 2012. This study is totally based on secondary data. Secondary data were collected from various reports of ISMR, from 2002 to 2012, and websites.

6. Analysis and Interpretation The turnover in non-repo dated securities (central and state government securities-Gsec.) traded in SGL had shown decreasing trend till2002 –03 to2006- 07 and after that upto 2012-13 it has been flutuative but in WDM these were traded averagely 60% of total traded in SGL.The total turnover generated through T-bill has only share of averagely 30% in comparison to the G-sec. Within ten years. The share PSU/Institutional Bonds is averagely 10-15% only and Non-government securities (corporate bonds and others) accounted for a meager 5%-7%only.on comparing overall

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traded debt securities in WDM the corporate securities has less contribution in the growth of Indian Debt Market as well as in financial market too. There is needed to be taking some policy measures to increase their share.

Table 1: Turnover of Debt Market Secondary Market (Government Securities, T-Bills, PSU/Institutional Bond & others) (Figures in Millions) Year Turnover of Non- Turnover of Non- Total Turnover Turnover Total Repo Central & Repo (millio of PSU/ of Others Turno s State Securities

Govt T-Bills

On SGL On (%) WDM (%)

2002 13,155,9 9,991,50 -03 89 7 (94.5%) (55.4%) 2003 15,813,0 12,185,2 -04 76 21 (92.9%) (49 %) 2004 9,897,35 7,246,65 -05 1 5 (78.5%) (73.2%) 2005 4,986,04 3,455,83 -06 0 2 (70.43% (69.3%) ) 2006 2,747,38 1,533,69 -07 4 7 (69%) (55.8%) 2007 3,541,76 1,944,14 -08 0 0 (70.8%) (54.9%) 2008 5,427,74 2,342,88 -09 9 4 (81.7%) (43.2%) 2009 6,304,23 3,285,11 -10 7 1 (69.9%) (52.1%) 2010 5,137,11 3,048,36 -11 7 0 (72.5%) (59.3%)

n)

(Corpora te Bonds etc.) On WDM (%)

ver in WDM (millio n)

159,237 (1.5%)

10,687 ,014

555,969 17,013, 271,116( 146,087 (46.3%) 632 2.1%) (1.1%)

13,160 ,962

1,246,59 5 (46.1%) 1,052,18 4 (50.2%)

197,866 (2.2%)

8,872, 936

7,080,1 121,734( 125,538 47 2.6%) (2.64%)

4,755, 235

On SGL On (%) WDM (%)

Inst. Bonds

On WDM (%)

767,845 313,990 13,923, 199,847 (5.5%) (40.9%) 834 (1.9%) 1,200,5 56 (7.1%) 2,711,3 14 (21.5%) 2,094,1 07 (29.57 %) 1,235,6 03 (31.1%) 1,461,2 87 (29.2%) 1,217,7 40 (18.3%) 2,714,1 49 (30.1%) 1,945,9 50 (27.5%)

12,608, 178,346 665 (2%)

519,540 3,982,9 44,178 (42%) 88 (2%)

93,648(4. 2,191, 3%) 065

659,948 5,003,0 92,318(3 126,760( 2,823, (45.2%) 47 .3%) 4.5%) 170 568,241 6,645,4 300,080( 148,313( 3,359, (46.7%) 88 8.9%) 4.4%) 515 931,911 9,018,3 868,329( 561,845( 5,638, (34.3%) 85 15.4%) 10%) 159 987,131 7,083,0 1,095,85 463,121 (50.7%) 67 5 (8.3%) (19.6%)

5,594, 468

Evaluation of Contribution of Debt Market in Indian Financial Market 2011 5,363,75 3,248,67 -12 8 3 (68.9%) (60.6% 2012 8,464,82 4,172,10 -13 1 9 (74.1%) (49.3%)

2,438,7 08 (31.3%) 2,953,4 01 (25.9%)

1,395,18 7 (57.2%) 1,799,16 8 (60.9%)

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7,802,4 1,199,03 488,896( 66 0 7.7%) (18.9%) 11,418, 1,278,70 665,148( 222 0 8.4%) (16.1%)

5,594, 468 7,922, 138

Source: nseindia, SGL-Subsidiary General Ledger, WDM-Whole Sale Debt

Table 2: Trend value of Indian Debt Market Secondary Market (G- Sec.,T-Bills, PSU/Inst. Bond & others) for the Security Turnover Year Trend value of Turnover of Non-Repo Turnover of PSU/ s Turnover of Non-Repo T-Bills Inst. Bonds Central & State Govt Securities

On SGL On WDM On SGL (million) (million) (million) 2002 10722528 8772419.3 1212491 -03 64 2003 10047828 7971648.0 1347096 -04 18 2004 9373127 7170876.6 1481700 -05 73 2005 8698427 6370105.3 1616305 -06 27 2006 8023726 5569333.9 -1067886 -07 82 2007 7349026 4768562.6 1885515 -08 36 2008 6674325 3967791.2 2020119 -09 91 2009 5999625 3167019.9 2154724 -10 45 2010 5324924 2366248.6 2289329 -11 2011 4650224 1565477.2 2423933 -12 55 2012 3975523 764705.90 2558538 -13 91 2013 3300823 2693143 -14 36065.436 36

On WDM (million) 465781.95 45 554986.72 73 644191.5 733396.27 27 822601.04 55 911805.81 82 1001010.5 91 1090215.3 64 1179420.1 36 1268624.9 09 1357829.6 82 1447034.4 55

Turnover Others (Corporate Bonds etc.)

of

On WDM On WDM (million) (million) -104931 33140.13636 18774.27

84265.90909

142479.2

135391.6818

266184.1

186517.4545

389889

237643.2273

513593.9

288769

637298.8

339894.7727

761003.7

391020.5455

884708.6

442146.3182

1008414

493272.0909

1132118

544397.8636

1255823

595523.6364

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Ms. Lovely Srivastava et al

2014 -15

2626122

836836.78 18

2827747

1536239.2 27

1379528

646649.4091

The trend turnover in non-repo dated securities (central and state government securities-G-sec.) traded in SGL is showing decreasing trend till2002 –13 while negative in 2014-15 and it shows same decreasing trend in WDM too. The trend in total turnover generated through T-bill is accounted inclination in WDM segment throughout the decade and same in SGL trade but exception negative decline in the year 2006-07 as compared to the G-sec.The share trend of PSU/Institutional Bonds is inclined from the year 2003-15 but was negative in 2002-03 and Non- government securities(corporate bonds and others) accounted for again in increasing trend from 33140.13 mn.(2002-03) to 646649.41 mn.(2014-15) in overall traded debt securities in WDM. The corporate securities have less contribution in the growth of Indian Debt Market as well as in financial market too. There is needed to be taking some policy measures to increase their share.

12000000 10000000 8000000

Trend value of Turnover of Non-Repo Central & State Govt Securities On WDM (million)

6000000

Trend value of Turnover of Non-Repo Central & State Govt Securities On SGL (million)

4000000 2000000

2014-15

2013-14

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

-2000000

2002-03

0

Chart 1: Trend value of Turnover of Non-Repo Central & State Govt Securities

Evaluation of Contribution of Debt Market in Indian Financial Market

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3500000 3000000 2500000 2000000 1500000

Turnover of Non-Repo T-Bills On SGL (million)

1000000

Turnover of Non-Repo T-Bills On WDM (million)

500000

2014-15

2013-14

2012-13

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

-1000000

2003-04

-500000

2002-03

0

-1500000

Chart 2: Turnover of Non-Repo T-Bills.

1600000 1400000 1200000 1000000 Turnover of PSU/ Inst. Bonds On WDM (million)

800000 600000

Turnover of Others (Corporate Bonds etc.) On WDM (million)

400000 200000

-200000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

0

Chart 3: Turnover of PSU/ Inst. Bonds (Corporate Bonds etc.)

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7. Conclusions Indian Debt market is in under developed form. The measure taken by the SEBI and RBI is quite good on the way of development of the market. Indian lenders with monitoring ability may behave in ways that do not mirror practices in the West. A higher level of monitored lending will be associated with higher outsourcing levels. Arm’s-length lenders in India, such as bondholders, may be prey to the collective action problems that beset numerous small-holders of debt certificates. They will have to rely on publicly available information. Or, they may have to expend significant resources to obtain privately held information about the firm. In India, easily accessible lenders will not have the ability to deal meaningfully with the firms they lend to. Hence, their debt will be associated with higher information costs and less monitoring possibilities. This implies that firms with greater reliance on approachable debt will also experience laxer external monitoring and thus engage in outsourcing activities. In addition to these changes there are more requirements to improve the market policies and other aspect of trading facility for the growth of debt market.

8. Recommendations We are recommending following points for the future prospect based on the analysis of changing pattern of past ten years. 1. The main reason behind such declining trend as mentioned in the graphs and tables is the lesser interest of investors for investing their surplus in government securities due to lesser rate of interest on such G-Sec. There is urgent need to increase limit of investment u/s 80C of Income Tax Act 1961 to attract more investment for such G-Secs. 2. Floating interest rate should be introduced in Indian Debt Market systematically. 3. RBI should take initiative for liberalizing the norms of investment for Financial Institutional Investments (FIIs).

References [1] [2] [3] [4] [5]

Economic Survey 2002-13, various reports of ISMR (2002-13) and www.nseindia.com Barua, Raghunathan, Jayant An Vetrma (1994) “Analysis of Indian Securities Industry: Market for Debt” Journal of Management,Vol19, No1 Black, Fischer, 1972. “Capital market equilibrium with restricted borrowing”, Journal of Business, 45, pp.444-455. Barua Samir, K.Raghunathan, V.Varma, Jayanth R., “Research on the Indian Capital Market:A Review”, Vikalpa, Vol. 19, No. 1,January-March 1994 Samir K.,Raghunathan V.,Varma Jayanth R., Venkiteswaran N, “Analysis of the Indian Securities Industry: Market for Debt” Vikalpa, Vol. 19, No. 1,January 1994