I am not sure if we are having a Nbfc crisis now. I know that some Nbfc are not able to raise money, but some are able to raise money at sub 9% p.a. if they want to raise more than Rs. 50 crores.
However, let me go back to a pet peeve. In 1993, Mr. R H Patil nudged us to take a “WDM” membership in NSE. Our cash flow or net worth would not permit us to be in the “big” category so we took the equities segment membership. Coming to think of it RBI has still not allowed the debt market to be even born. So 26 years later we are still talking about developing a debt market. If RBI has its way, we will never ever do it.
Is is difficult to do it? Well for the retail investor could we just not start with national savings certificate, gilt, kisan vikas patra and FMP? Would that not be good? I have not bought Nsc – national savings certificate – just because I have no clue about the paper we are getting. What if it is fake? I would rather stay away.
Now imagine if we had a robust debt market (like we have a robust equity market)…what would happen?
Companies like Dhfl will be able to borrow at say 12% pa and at the same time Cholamandalam could borrow at 8%pa. Same market, different investors with different risk-reward expectations. As simple as that. Money would be available to anybody and everybody – at a price. Will people invest in DHFL? I do not know, but somebody is buying Dhfl shares at Rs. 112, right? So just give us a clean market – the investor will decide where to invest.
Not having a secondary market helps RBI think that it controls the interest rates in the country. It also forces people to keep their money in suboptimal assets like savings account, liquid funds, debt funds, endowment plans, etc. Do you realize that endowment plans are just a regulator arbitrage? If you buy a gilt directly (which you can’t) on that interest you will pay Income tax. If you buy a pension plan, the plan will invest the amount in gilt, and you will pay no tax in the accumulation phase. On maturity about 2/3 of the amount accumulated would be tax free, however the 1/3rd will become a pension, and that pension will be taxable. However, if I structure it like a money back policy, and invest in GSec…I can get tax free returns. Same product, just regulations arbitrage. Makes no sense, but that is exactly how it operates. Now if we build a robust Gov securities debt fund market, slowly you could let companies issue debentures with short maturity. You could then allow big companies to issue bonds upto 5 year duration – including zcb.
Will the government allow this? No.
If I were an employee wondering where to invest Rs. 20L I will not even think twice. It will OBVIOUSLY go into my voluntary Provident fund..taxfree, government guaranteed, good rate of interest.
Uff…i have meandered…but I hope you got what I wanted.
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