Use of corp bond funds for infra push not a viable option: Reddy

MUMBAI: Y V Reddy, former governor of Reserve Bank of India ( RBI), has rejected the view held by his successor at the central bank that a developed corporate bond market is necessary to fund infrastructure.

Instead, he called for good governance by indicating that public policy should play an active role in funding infrastructure. “Bad governance will feed in itself for bad finance (and misallocation of resources),” he said.

Both Subir Gokarn, deputy governor, and Deepak Mohanty, executive director, called for a need to develop corporate bond market to help financing of infrastructure at a seminar on ‘Investment and Its Finance’ in Mumbai over the past two days.

“Which country in the world has funded its infrastructure through corporate bonds. Empirical evidence suggests that nowhere in the world, perhaps with the exception of the US,” said Reddy on the sidelines at the seminar. “The US, however, is a very different situation in the current context.” He added that instances of these would be few and far between.

In his recent book ‘Global Crisis Recession and Uneven Recovery’ , Reddy has said, “The corporate bond market continues to be dominated by private placement and select players, and the process of price discovery is yet to gain full credibility.” Even in China, it is the government which has directly invested in developing infrastructure while the Indian government has been encouraging public-private partnership for infrastructure . On Friday, Deepak Mohanty said that there is a need to reform the pension and insurance sector, and develop corporate bond market to finance infrastructure.

On Thursday, Mr Gokarn said that RBI is focusing on developing a strong corporate bond market to fund infrastructure development. It is estimated that India will require financing to the turn of . 1-lakh crore for the 12th Plan period which begins from 2012. He said that this is needed to take away the burden from banks to finance infrastructure. In fact, earlier in September this year, former RBI deputy governor Usha Thorat had said that no other sector had posed as much challenge as the infrastructure sector.

She had then clarified that the central bank is not in favour of giving banks any further relaxation in lending to the infrastructure sector, terming it as ‘imprudent’ and that higher exposure to infrastructure could result in concentration of risks and asset-liability mismatches. According a study by Boston Consultancy Group, nearly 50% of infrastructure funding in India comes from the banking sector.