Context and Budgetary Signals
- Budget 2026 signalled gradual shift towards market-based financial sector reforms.
- Proposals include corporate bond market-making and development of bond derivatives instruments.
- Introduction of total-return swaps aims to enable structured credit risk transfer.
- Infrastructure Risk Guarantee Fund proposed to de-risk long-gestation infrastructure financing.
- CPSE real estate monetisation through REITs seeks to deepen capital markets.
Structural Imbalance in Credit Architecture
- Indian banks bear risks typically distributed through mature financial markets globally.
- Government bond market deep, supported by predictable issuance and RBI oversight.
- Government securities outstanding near 90% of GDP, comparable with advanced economies.
- Corporate bond market shallow at 15–16% of GDP.
- Bond market depth far lower than U.S., China, and Germany.
Overburdened Banking System
- Banks hold 60–65% of non-financial corporate debt in India.
- Comparable share is ~30% in U.S. and ~40% in Europe.
- Shallow markets force banks to become default risk warehouses.
- Long-term project finance dominates bank lending portfolios.
- This concentration heightens systemic fragility during economic downturns.
Financial Stability and Credit Flow Risks
- Banks rely on short-term deposits but finance long-gestation infrastructure assets.
- This creates severe maturity mismatch and liquidity vulnerability.
- Project delays translate into sudden stress on bank balance sheets.
- Government recapitalised PSBs with over ₹3.2 lakh crore since 2017.
- Public recapitalisation effectively socialised private sector credit losses.
Market Gaps and Reform Imperatives
- Corporate bond issuance dominated by private placements and top-rated firms.
- Secondary market liquidity remains thin, limiting price discovery.
- Household and foreign investor participation remains marginal.
- Weak bond markets distort monetary policy transmission across maturities.
- Budget reforms aim to shift credit risk from banks to markets.