Credit market in India

A market for borrowing money in the form of bank loans, bonds etc. is called credit market. It is also known as debt market since it deals in debt instruments. Participants in the credit market work as lenders and borrowers of debt.

The credit market in India plays an important role in meeting the financing needs of various segments of the economy. This market is regulated by Reserve bank of India (RBI), Securities and exchange board of India (SEBI), The Securities Contracts Regulation Act (SCRA) and Department of company affairs(DCA).

Institutions

Credit institutions range from well-developed and large sized commercial banks to development finance institutions (DFIs) to localized tiny co-operatives. They provide credit facilities in the form of short-term working loans to corporates, medium and long-term loans for financing large infrastructure projects and retail loans for various purposes. A wide range of financial institutions exist in the country to provide credit to various sectors of the economy. These include:

  • Commercial banks
  • Regional Rural Banks (RRBs)
  • Cooperatives [comprising urban cooperative banks (UCBs), State co-operative banks (STCBs), district central co-operative banks (DCCBs), primary agricultural credit societies (PACS), state co-operative and agricultural rural development banks (SCARDBs) and primary co-operative and agricultural rural development banks (PCARDBs).
  • Financial institutions (FI) (term-lending institutions, both at the Centre and State level, and refinance institutions)
  • Non-banking financial companies (NBFCs): NBFCs can be broadly classified into three categories, viz. Asset finance companies (such as leasing and hire purchase), Loan companies and Investment companies. A separate category of NBFCs, called the residuary non-banking companies (RNBCs), also exists as it has not been categorized into any one of the above referred three categories.
  • Non-banking companies like Chit Funds, mutual benefit financial companies (Nidhis and unnotified Nidhis) and housing finance companies.
  • Unorganized credit institutions like moneylenders.

Of all institutions, in terms of assets, commercial banks constitute the largest category, followed by rural co-operatives.

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Instruments

Indian debt market is one of the largest in Asia. Credit markets are now fully developed capital markets that deal in buying and selling of debt instruments. Indian debt market deals in the following instruments:

Loans

Credit institutions provide loans to various borrowers for short, medium and long durations that is to be repaid over a certain period of time along with interest payments. Collateral security is needed to raise loans.

Government Securities

It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India (central and state government).These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable semi-annually. For shorter term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.

Bonds/Debentures

Bonds issued by Public Sector Undertakings(PSU bonds), bonds issued by FIs(FI bonds),  bonds issued by corporations (corporate securities/debentures) forms the various types and are offered for tenures up to 15 years. Comparing to G-Secs, corporate bonds carry higher risks, which depend upon the corporation, the industry where the corporation is currently operating, the current market conditions, and the rating of the corporation. However, these bonds also give higher returns than the G-Secs.

Certificate of Deposit

These are unsecured negotiable money market instruments. Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in demat form or as Usance Promissory Notes against funds deposited at a bank or other eligible financial institution. There are several institutions that can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year. CDs from financial institutions have maturity between 1 and 3 years. CDs are available in the denominations of ` 1 Lac and in multiples thereafter.

Commercial Papers

There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate entities in the form of promissory notes at a discount to face value. They are available in denominations of 5 lac.

Factors Affecting Credit Market

  • Internal Factors
    • Interest rate movement in the system
    • RBI economic policies
    • Demand for money
    • Government borrowings to tide over its fiscal deficit
    • Supply of money
    • Inflation rate
    • Credit quality of the issuer.

    External Factors

    • World Economy & its impact
    • Foreign Exchange
    • Fed rate cut
    • Crude Oil prices
    • Economic Indicators

Benefits of Credit Market

  • Helps in borrowing
  • Fixed income through investment in this market
  • Liquidity of funds when required
  • Variety of choices of instruments
  • Convenience and simplicity

Drawbacks of Credit Market

  • Risks: Credit market also includes risks like credit risks and over lending risk.
  • Default of repayment of risk is called credit risk.
  • Lending more than the capacity is called over lending risk.

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