Bond Market in India
BONDS MARKET IN INDIA
What are Bonds?
A bond is a debt security in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds have a maturity period of more than one year which differentiates it from other debt securities like commercial papers, treasury bills and other money market instruments.
Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.
History of Bond Market in India:
During the post independence era India had only traditional commercial banks, all with private sector ownership. These banks were ready to provide working capital to industries but not long term financing because of the fear of asset liability mismatch.
The Government was in urgent need of some financial intermediaries that could provide term finance for infrastructure development and expansion. Thus came into picture national and state level development financial institutions (DFIs) which were backed by Reserve Bank of India and Govt. of India through various incentives and other supportive measures for providing long term financing to all range of industrial units. To enable DFIs to finance industry at concessional rates, the Govt. and RBI gave them access to low cost funds; also they were allowed to issue bonds under Govt. guarantee and were given funds from budget too.
The whole financial sector was regulated by RBI, so much so that commercial banks were not allowed to provide working capital loans on an interest rate lower than DFIs long term project finance loan. Hence DFIs enjoyed a virtual monopoly in long term finance.
What are Bonds?
A bond is a debt security in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds have a maturity period of more than one year which differentiates it from other debt securities like commercial papers, treasury bills and other money market instruments.
Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.
History of Bond Market in India:
During the post independence era India had only traditional commercial banks, all with private sector ownership. These banks were ready to provide working capital to industries but not long term financing because of the fear of asset liability mismatch.
The Government was in urgent need of some financial intermediaries that could provide term finance for infrastructure development and expansion. Thus came into picture national and state level development financial institutions (DFIs) which were backed by Reserve Bank of India and Govt. of India through various incentives and other supportive measures for providing long term financing to all range of industrial units. To enable DFIs to finance industry at concessional rates, the Govt. and RBI gave them access to low cost funds; also they were allowed to issue bonds under Govt. guarantee and were given funds from budget too.
The whole financial sector was regulated by RBI, so much so that commercial banks were not allowed to provide working capital loans on an interest rate lower than DFIs long term project finance loan. Hence DFIs enjoyed a virtual monopoly in long term finance.