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Over-reliance on bank lending, moreover, exposes an economy to the risk of a banking crisis that could find companies being denied credit. An active and efficient bond market gives them an alternative means of raising debt capital in the event of a credit crunch. It also leads to better pricing of credit risk (since expectations of all market participants are incorporated into bond prices).

In a nutshell, absence of high-yield bond market is causing huge opportunity cost to the Indian economy. High-yield bond market will give alternative source of funds to even SME sector and entrepreneurs leading to industrial growth. It will also encourage growth in service sector industries like media, entertainment, communication and hospitality. Investible surpluses will be channelised for sustainable development of the economy. All this will have a 'snow-ball effect' on the growth of the economy.

7. Conclusion

The current scenario of the Indian economy suggests existence of a gap as far as funding resources for business development are concerned. This gap can be effectively filled with the establishment of high-yield bond market in India.

If we compare the current state of economy with that of the USA in 1990s when junk bond market was established there, we find that conditions are suitable in India for this initiative. A booming economy, availability of investible surpluses, increasing need for funds by corporates, well-established securities market and infrastructure, increasing awareness among investors and availability of real time information are the main factors that have helped to create a conducive environment for building a high-yield bond market.

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* Contributed by -
Neha Agarwal & Padmakar Kulkarni,
PGDIM - XI,
NITIE, Mumbai.