Mumbai, Jan 12 (PTI) Reserve Bank deputy governor SubirGokarn today allayed the fears of the industry about theregulatory confusion regarding the development of corporatedebt market.
"The industry has to understand that developing a vibrantcorporate debt market is a complicated process as all theregulators as well as the finance ministry are involved.
However, I would like to state that there is no confusionregarding the role of each regulator in this process as we areall working in tandem," Gokarn told a seminar on corporatefinance organised by industry chamber Ficci here today.
Prior to his speech, Tata Sons finance director IshaatHussain had said there is a lot of confusion among theregulators about their role in this process.
"At our discussions on the corporate debt marketdevelopment with the Sebi, the overriding impression that weget from the capital markets regulator is that it is not sureabout the role it has in the entire exercise," said Hussain,who is a member of the Sebi panel on the topic.
Gokarn further clarified that the regulators are allworking in earnest to have a coordinated approach to this, asbanks alone cannot fund the huge financing needs of theeconomy that is growing at around nine per cent.
It can be noted that currently, 80 per cent of theinfrastructure funding is met by banks, which is notsustainable in the long-run. Going by the long gestationperiod of infrastructure projects, bank funding to the sectorcan lead to asset-liability mismatch of banks. After all, thedeputy governor noted that infrastructure funding by banks isnot the basic function of banks. (More) PTI BEN VKV
When Hussain pointed out that the dependence on bank funding to infrastructure sector will not be sustainable inthe long-run as the country''s banks are not capitalisedenough, let alone have the scale to fund large M&As and largeinfrastructure projects, Gokarn said, neither the size normore number of banks can ensure this.
However, Gokarn admitted that the banking and financialsector needs more competition and capital base, and RBI isworking towards this. The central bank is slated to come outwith new bank licences any time from now.
Speaking at the function, L&T chief financial officer Y MDeosthalee pointed out that bank funding cannot be themainstay of infrastructure financing, primarily because it isnot the basic job of banks as Gokarn pointed out and alsobecause if banks were to do so, then other sectors of theeconomy will suffer.
The government is planning a USD one trillion or Rs 45lakh crore investment in the infrastructure space, such asroads, ports, airports and other key infrastructure sectorsduring the 12th Plan period that will start rolling from2012-13. This planned investment is double the amount thecountry put into the infra space in the 11th Plan.
As the government, RBI and the industry understand thatthe domestic banks do not have the capabilities to financesuch a huge investment, they are working on developingalternate source of funding mechanism, such as corporate debtmarket. .
As the government, RBI and the industry understand that the domestic banks do not have the capabilities to financesuch a huge investment, they are working on developingalternate source of funding mechanism, such as corporate debtmarket.
Currently, the country''s debt market is massivelydominated by government bonds and securities, leaving verylittle for the private sector bonds.
When Deosthalee said the country''s low incrementalcapital output ratio (ICOR) is low, which is one of the mainreasons for domestic savings to remain with the banks or inimmovable assets, Gokarn said, our ICOR is low not justbecause of this but primarily because our economic growth ismainly driven by services and not manufacturing like that ofChina.
However, Gokarn admitted that manufacturing needs to bepropped up so that better ICOR can be arrived at. He alsoadmitted that 50 per cent of the household savings, whichstand at over 34 per cent now, go to the banking and financialsector as there is no viable options left to them.
Deosthalee also called for more avenues of risk capitalfor corporates, which can take the burden off banks. Hefurther called for more financially viable infrastructureprojects as today there is no quality bidding process inplace.
However, Hussain differed with the rest of the speakerssaying that money is not an issue for a company that has agood track record and good corporate governance practice inplace. He also pointed out that when Tata Steel took over theBritish steel major Corus for USD 11 billion in 2007, thecompany did not find any problem in finding bankers to fundthe deal.