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To compute the VAR margin, we need to analyze the default rates (roughly in the range of 2-3%), and thereby, we come to a conclusion that a VAR margin of 25% is said to be okay, and therefore, adjustment to the lending rate for the same and required provisioning should be made.

After we compute the value and we are done with the functioning of the market, we need to analyse the likely impact on the Indian economy.

3. Impact of Junk Bond Market on Economic Development

The junk bonds serve as a powerful tool in the hands of weak companies in their bid to take on mightier rivals. Thus, companies unable to undertake risks due to the fact that they are considered by third party economic agents as beyond the entities' capacity can take on ambitious projects with positive NPVs. This phenomenon would result in economic growth over a prolonged period of time.

These days the necessity for junk bonds market is felt even more acutely with the declining involvement of domestic financial institutions in providing long term loans to the corporate sector. Thus, the burden of granting long term credit has fallen squarely on the shoulders of commercial banks. This situation has led to excess dependence on commercial banks which is fraught with dangers. During phases of economic downturn, default by major clients of commercial banks would lead to banking crisis.

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* Contributed by -
Saurabh Joshi & R. T. Sivasubramaniyan,
PGDM - II Finance,
SCMHRD, Pune.