The overall supply of corporate bonds, which was around Rs 27.4 trillion at the end of 2017-18, could double to Rs 55-60 trillion by the end of 2022-23, especially with issuances by financial sector and infrastructure companies. However, without adequate reforms, regulatory push, government initiatives and an expansion of the debt market to introduce new instruments like credit default swaps (CDS), there is likely to be a demand gap of Rs 3-4 trillion, says a report by rating agency CRISIL.

“To structurally bridge the demand-supply gap, we need a big step-up in investor awareness, better coordination across the ecosystem, continuation of regulatory reforms, and introduction of new instruments and hedging mechanisms,” said Ashu Suyash, managing director and chief executive officer of CRISIL.

The demand for corporate banks will rise to over Rs 53 trillion, primarily led by investments from retirement funds, insurance companies, mutual funds, foreign portfolio investors and others, and banks.

CRISIL said that the growth would mainly be driven by higher capital expenditure funding requirements for infrastructure projects, issuances by non-banking financial companies (NBFCs) and housing finance companies (HFCs), and a regulatory push for large companies to raise incremental funds from the bond market.

From constituting 16 per cent of Gross Domestic Product (GDP) as of today, the substantial growth expected over the next five years would increase the corporate bond market’s contribution to 20 per cent of GDP by 2022-23.

Banks and large lending institutions issued around Rs 1.95 trillion worth of bonds in 2017-18, which is down from Rs 20.22 trillion worth of issuances the previous year. Bond issuances by industrial companies decreased from Rs 1.74 trillion to Rs 1.37 trillion during the same period.

Further, power companies issued Rs 498.14 billion worth of bonds in 2017-18, as against Rs 754 billion the previous year.

For the infrastructure sector, CRISIL estimates that the sector would need Rs 55.2 trillion in capex funding over the next five years. This includes roads, power (generation, transmission and distribution), railways, irrigation, and urban infrastructure.

To fund this capex requirement, around 30 per cent of the requirement could be raised from the bond market, as issuances from the sector are expected to rise by Rs 8-9 trillion by 2022-23, the report states.

Non-infrastructure companies in steel, cement, oil and gas upstream and auto segments would require around Rs 10 trillion in capex funding, and CRISIL estimates that such companies would add over Rs 2.5-3.5 trillion in additional issuances over the next five years.

NBFCs and HFCs could require additional capital of Rs 30-33 trillion over the next five years to continue meeting their capital requirements and sustaining their present high growth model. Around Rs 13-15 trillion will be raised by NBFCs/HFCs in the next five years from the corporate bond market.

“For public sector banks, growth will be muted in the near term, given their constrained ability to lend. A sharp fall in profitability has diminished capital generation from internal accruals, while weak performance has impaired their ability to raise capital from external sources,” states the report.

Banks are expected to raise around Rs 1.5-2 trillion from the corporate bond market in the next five years.

Overall, an additional Rs 3-4trillion worth of bond issuances could come in, provided that the Reserve Bank of India and the Securities and Exchange Board of India make structural changes like the creation of a tripartite repo market, and fast-track the setting up of the Bond Guarantee Fund of India, states the rating agency.