Debt market

Meaning- something, typically money, that is owed or due.

Basic Bond Characteristics

A bond is simply a type of loan taken out by companies. Investors lend a
company money when they buy its bonds. In exchange, the company pays an
interest “coupon” (the annual interest rate paid on a bond, expressed as a
percentage of face value) at predetermined intervals (usually annually or
semiannually) and returns the principal on the maturity date, ending the loan.

Unlike stocks, bonds can vary significantly based on the terms of the bond’s
indenture, a legal document outlining the characteristics of the bond. Because
each bond issue is different, it is important to understand the precise terms
before investing. In particular, there are six important features to look for when
considering a bond.

Maturity
The maturity date of a bond is the date when the principal, or par, amount of the
bond will be paid to investors, and the company’s bond obligation will end.

secured/Unsecured
A bond can be secured or unsecured. Unsecured bonds are called debentures;
their interest payments and return of principal are guaranteed only by the credit
of the issuing company. If the company fails, you may get little of your investment
back. On the other hand, a secured bond is a bond in which specific assets are
pledged to bondholders if the company cannot repay the obligation.

Coupon
The coupon amount is the amount of interest paid to bondholders, normally
annually or semiannually.

The debt market is the market where debt instruments are traded. Debt instruments are
assets that require a fixed payment to the holder, usually with interest. Examples of debt
instruments include bonds (government or corporate) and mortgages. The equity
 market (often referred to as the stock market) is the market for trading equity
instruments.

How are debt instruments different from equity instruments?

There are important differences between stocks and bonds. Let me highlight
several of them:

1. Equity financing allows a company to acquire funds (often for investment)

without incurring debt. On the other hand, issuing a bond does increase the
debt burden of the bond issuer because contractual interest payments must be
paid— unlike dividends, they cannot be reduced or suspended.

2. Those who purchase equity instruments (stocks) gain ownership of the

business whose shares they hold (in other words, they gain the right to vote
on the issues important to the firm). In addition, equity holders have claims
on the future earnings of the firm.

In contrast, bondholders do not gain ownership in the business or have any

claims to the future profits of the borrower. The borrower’s only obligation is
to repay the loan with interest.

3. Bonds are considered to be less risky investments for at least two reasons.
First, bond market returns are less volatile than stock market returns. Second,
should the company run into trouble, bondholders are paid first, before other
expenses are paid. Shareholders are less likely to receive any compensation
in this scenario.
4. Why are these markets important?
5. Both markets are of central importance to economic activity. The bond
market is vital for economic activity because it is the market where
interest rates are determined. Interest rates are important on a personal
level, because they guide our decisions

There are different types of Debt Instruments available in India such as;
 Bonds.
 Certificates of Deposit.
 Commercial Papers.
 Debentures.
 Fixed Deposit (FD)
 G - Secs (Government Securities)
 National savings Certificate (NSC)
 NBFC
 NBH

BOND

The bond market—often called the debt market or credit market is a financial
marketplace where investors can trade in government-issued and corporate-
issued debt securities. Governments typically issue bonds in order to raise
capital to pay down debts or fund infrastructural improvements. Publicly-traded
companies issue bonds when they need to finance business expansion projects
or maintain ongoing operations.
avg return : 6%
avg return of large stock companies : 10%

Types of bonds
 Government bond
 Corporate bonds
 Municipal bonds
 Mortgage backed bond

Certificates of Deposit.

 CDs are negotiable money market instrument, issued in

dematerialised form for funds deposited at banks for a specified
period at specified rates.
 Launched in 1989
 Motive - Banks issue CDs to compete with other financial
intermediaries and to counter process of securitization.
 Features:
  Scheduled commercial banks and FIs can issue
 Rate of interest and maturity specified.
 They are transferable /negotiable
 Short Maturity
 Highly liquid and riskless instruments.
 Issued to individuals, corporations, trusts, funds, associations etc.

Commercial Papers.

 CP is an unsecured money market instrument issued in the form of a

promissory note issued by corporates, PDs, all India FIs.
 Introduced in 1990, as a privately placed instrument, with a view to
enable highly rated corporate borrowers to diversify their sources of
short-term borrowings.
 Subsequently, PDs and all India FIs were also permitted to issue.
 Features:
 It’s a promissory note. Prior approval of RBI needed.
 Unsecured.
 short-term : 7 days-1 year
 Rated, Safe and negotiable
 Issued at discount of face value.
 May have a buy-back facility too.

Debentures.

A debenture is a type of debt instrument unsecured by collateral. Since debentures

have no collateral backing, debentures must rely on the creditworthiness and
reputation of the issuer for support. Both corporations and governments frequently
issue debentures to raise capital or funds.
In corporate finance, a debenture is a medium- to long-term debt instrument used by
large companies to borrow money, at a fixed rate of interest.
Difference between bonds and debentures is that bonds are more secure as they have
a collateral attach to the issue of bonds
Debentures are rated by CRISIL. For ex, AAA+, AA+,BB+…

A debenture is a type of debt instrument that is not secured by collateral and

usually has a term greater than 10 years.
Debentures are backed only by the creditworthiness and reputation of the issuer.
Both corporations and governments frequently issue debentures to raise capital or
funds.

Some debentures can convert to equity shares while others cannot

Fixed Deposit (FD)

A fixed deposit (FD) is a financial instrument provided by banks or NBFCs
which provides investors a higher rate of interest than a regular savings
account, until the given maturity date. It may or may not require the
creation of a separate account.
The minimum limit: 1000
Average return: 6.25%
Highest return is by Mahindra finance: 9.1%

G - Secs (Government Securities)

What is a Government Security (G-Sec)?

A Government Security (G-Sec) is a tradable instrument issued by the Central

Government or the State Governments. It acknowledges the Government’s debt
obligation. Such securities are short term (usually called treasury bills, with original
maturities of less than one year) or long term (usually called Government bonds or dated
securities with original maturity of one year or more). In India, the Central Government
issues both, treasury bills and bonds or dated securities while the State Governments
issue only bonds or dated securities, which are called the State Development Loans
(SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-
edged instruments.

Types

a. Treasury Bills (T-bills)

 b. Cash Management Bills (CMBs)

c. Dated G-Secs

i. Fixed rate bonds.

ii. Floating Rate Bonds (FRB)
iii. Zero Coupon Bonds
iv. Capital Indexed Bonds
v. Inflation Indexed Bonds (IIBs
vi. Bonds with Call/ Put Options
vii. Special Securities
viii. STRIPS – Separate Trading of Registered Interest and Principal of Securities
ix. Sovereign Gold Bond (SGB)

d. State Development Loans (SDLs)

Why should one invest in G-Secs?

 G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment
of interest and repayment of principal.
 They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the
need for safekeeping.
 G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to
suit the duration of varied liability structure of various institutions.
 G-Secs can be sold easily in the secondary market to meet cash requirements.
 G-Secs can also be used as collateral to borrow funds in the repo market.

How are the G-Secs issued?

G-Secs are issued through auctions conducted by RBI.

National savings Certificate (NSC)

The National Savings Certificate is a fixed income investment scheme that you can open with any
post office. A Government of India initiative, it is a savings bond that encourages subscribers –
mainly small to mid-income investors – to invest while saving on income tax. A fixed income
instrument like Public Provident Fund and Post Office FDs,

Features of NSC
a. Fixed income: Presently, you get guaranteed returns (8% annual interest) and can enjoy a
regular income.
b. Types: The scheme originally had two types of certificates – NSC VIII Issue and NSC IX
Issue. The Government discontinued NSC IX Issue in December 2015. So, only the NSC
VIII Issue is open for subscription currently.
c. Tax saver: As a government-backed tax-saving scheme, you can invest for up to Rs 1.5
lakh to claim the benefits of 80C deductions.
d. Start small: You can invest as small as Rs. 100 (or multiples of 100) as an initial
investment, and increase the amount when feasible.
e. Interest rate: Currently, the rate of interest is 8%, which the government revises every
quarter. It gets compounded annually, but will be payable at maturity.
f. Maturity period: There are two maturity periods to choose from – one for 5 years and the
other for 10 years.
g. Access: You can purchase this scheme from any post office by submitting the necessary
documents and doing the KYC process. It is easy to transfer the certificate from one PO to
another too.
h. Loan collateral: Banks and NBFCs accept NSC as a collateral or security for secured
loans. To do this, the concerned post master should put a transfer stamp to the certificate
and transfer it to the bank.
i. Power of compounding: Interest you earn on your investment gets compounded and
reinvested by default, though the returns do not beat inflation.
j. Nomination: Investor can nominate a family member (even a minor) so that they can inherit
it in the unfortunate event of the investor’s demise.
k. Corpus after maturity: Upon maturity, you will receive the entire maturity value. Since there
is no TDS on NSC payouts, the subscriber should pay the applicable tax on it.
l. Premature withdrawal: Generally, one cannot exit the scheme early. However, they accept
it in exceptional cases like the death of investor or if there is a court order for it.

Comparing NSC with the other tax-saving investments

NBFC (non-banking financial services)

These are companies registered under Companies Act engaged in the business of
accepting deposits and delivering credit. The balance sheet size of non-bank
financial companies (NBFCs) grew by 17.2 per cent to Rs26 trillion in
September 2018 from Rs22.2 trillion in September 2017. Net profit of sector
increased by 16.2 per cent during the half year ended September 2018 as
compared to 22.9 per cent during the year ended March 2018, Gross non-
performing assets of the NBFC sector as a percentage of total advances rose to
6.1 per cent in September 2018 from 5.8 per cent in March 2018. The sector
saw a 5.8 per cent increase in share capital in September 2018 whereas
borrowings grew by 17.2 per cent, Loans and advances of the NBFC sector
increased by 16.3 per cent and investments increased by 14.1 per cent, the
report highlighted.
The sector's capital to risk-weighted assets ratio (CRAR) decreased to 21 per
cent in September 2018 from 22.8 per cent in March 2018.
NBFCs are required to maintain a minimum capital level consisting of tier-I
and tier-II capital, of not less than 15 per cent of their aggregate risk-weighted
assets.
The report said various stress test results for individual NBFCs indicate that
around 8 per cent of the companies will not be able to comply with the
minimum regulatory capital requirements of 15 per cent.

 loans and advances, acquisition of stocks, or other marketable

securities, leasing, hire-purchase, chit business but does not include
any institution, whose principal business is that of agriculture or
industrial activity, purchase / sales of any goods, or construction sale
of immovable property.
 They cannot accept demand deposits.
 No SLR, CRR.
 They don’t form part of Payment and settlement system and cannot
issue cheques drawn on itself.
 Deposit insurance facility of Deposit Insurance and Credit Guarantee
corporation (DICGC) is not available to depositors of NBFCs, unlike
banks.
 Functions:
 They supplement the banking sector in providing finance to
corporate sector and delivering credit to small borrowers.
 They are more flexible than banks – assume greater risks, quick
decisions and tailor made services
 Sources of funds:
 Public deposits
 Equity and surpluses
 Borrowings – Debenture.
  Application:
 Hire-purchase
 Equipment leasing
 Loans

NHB
National Housing Bank (NHB), a Government of India owned entity, was
set up on 9 July 1988 under the National Housing Bank Act, 1987. NHB is
an apex financial institution for housing. NHB has been established with an
objective to operate as a principal agency to promote housing finance
institutions both at local and regional levels and to provide financial and
other support incidental to such institutions and for matters connected
therewith.
NHB registers, regulates and supervises Housing Finance Company
(HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-
ordinates with other Regulators.
genesis
The Sub-Group on Housing Finance for the Seventh Five Year Plan (1985–
90) identified the non-availability of long-term finance to individual
households on any significant scale as a major lacuna impeding progress
of the housing sector and recommended the setting up of a national level
institution.
The Committee of Secretaries considered' the recommendation and set up
the High Level Group under the Chairmanship of Dr. C. Rangarajan, the
then Deputy Governor, RBI to examine the proposal and recommended the
setting up of National Housing Bank as an autonomous housing finance
institution. The recommendations of the High Level Group were accepted
by the Government of India.
The Hon’ble Prime Minister of India, while presenting the Union Budget for
1987-88 on 28 February 1987 announced the decision to establish the
National Housing Bank (NHB) as an apex level institution for housing
finance. Following that, the National Housing Bank Bill (53 of 1987)
providing the legislative framework for the establishment of NHB was
passed by Parliament in the winter session of 1987 and with the assent of
the Hon’ble President of India on 23 December 1987, became an Act of
Parliament.
The National Housing Policy, 1988 envisaged the setting up of NHB as the
Apex level institution for housing.
In pursuance of the above, NHB was set up on 9 July 1988 under the
National Housing Bank Act, 1987. NHB is wholly owned by Govt. of India
as after 24 April 2019 notification of RBI, which contributed the entire paid-
up capital. The general superintendence, direction and management of the
affairs and business of NHB vest, under the Act, in a Board of
Directors.The Head office of NHB is at New Delhi.
Vision
"Promoting inclusive expansion with stability in housing finance market"
Mission
"To harness and promote the market potentials to serve the housing needs
of all segments of the population with the focus on low and moderate
income housing"
Objectives
NHB has been established to achieve, inter-Alia, the following objectives –

1. To promote a sound, healthy, viable and cost effective housing

finance system to cater to all segments of the population and to
integrate the housing finance system with the overall financial
system.
2. To promote a network of dedicated housing finance institutions to
adequately serve various regions and different income groups.
3. To augment resources for the sector and channelize them for
housing.
4. To make housing credit more affordable.
5. To regulate the activities of housing finance companies based on
regulatory and supervisory authority derived under the Act.
6. To encourage augmentation of supply of buildable land and also
building materials for housing and to upgrade the housing stock in
the country.
7. To encourage public agencies to emerge as facilitators and suppliers
of serviced land, for housing.
The housing regulator has proposed to raise their capital adequacy ratio to
13% by March 2020 from 12% now as a fallout of the IL&FS-led crisis
which forced several specialised home loan lenders, especially the smaller
one, to slow down business to preserve liquidity.

The draft amendments has proposed raising the CAR to 15% in a

staggered manner by March 2022, while suggested a higher cap on
borrowing.

“HFCs are exposed to risks arising out of counterparty failures, funding

risks and risks pertaining to liquidity and solvency as any other financial
sector player. There is thus a need for a review of the regulatory framework
of HFCs,’ NHB said in a note to stakeholders.
Most of the bigger HFCs carry sufficient capital to meet the proposed norm,
experts tracking the sector said.

NHB has sought comments on the proposals by March 31.

The regulator also wanted to reduce borrowing limits for HFCs in graded
way. It proposed the cap on borrowing at 14 time of net-owned fund by
March 2020, 13 time of NOF by March 2021 and 12 times by March 2022.
“This was not unexpected following the IL&FS crisis. The regulatory
restriction will now shape how much leverage housing finance company or
NBFCs can take. This may impact smaller HFCs or those with high
leverage ratio,” HDFC chief executive officer Keki Mistry told ET.
He however said that HDFC would not be impacted for the next seven/eight
years the the nation’s largest housing finance company has about 19%
CAR and as far as leveraging is concerned, its debt-equity ratio was 4.7
times as on December.

“Most of the HFCs would be able to meet the revised norms on CRAR, as
most of the HFCs which are nearing 15-16% CRAR and would have
adequate cushion to raise Tier II capital and shore up the CRAR, if
required.” said Supreeta Nijjar, ICRA’s head for financial sector ratings.
“Also, the capital adequacy for HFCs is supported by the lower risk weights
on smaller ticket size home loans which is the growth area for most HFCs,”
she said.
Primary market and secondary market
 BASIS FOR SECONDARY
PRIMARY MARKET
COMPARISON MARKET

Meaning The market place for new The place where

shares is called primary formerly issued
market. securities are traded is
known as Secondary
Market.

Another name New Issue Market (NIM) After Market

Type of Purchasing Direct Indirect

Financing It supplies funds to It does not provide

budding enterprises and funding to companies.
also to existing companies
for expansion and
diversification.

How many times a Only once Multiple times

security can be sold?

Buying and Selling Company and Investors Investors

between

Who will gain the Company Investors

amount on the sale
of shares?

Intermediary Underwriters Brokers

 BASIS FOR SECONDARY
PRIMARY MARKET
COMPARISON MARKET

Price Fixed price Fluctuates, depends on

the demand and supply
force

Organizational Not rooted to any specific It has physical existence.

difference spot or geographical
location.

What happens when companies fail to repay the debt :

For Gold Loans:
In case of gold loan, if the borrower fails to repay the loan, the lender has the full authority to sell
the gold and recover their money. If the price of gold is more the money left after taking the
outstanding amount will be returned to the borrower.
Home Loans:
Any kind of default against a home leads to the auctioning the property by the lender through the
legal process.
Auto Loans:
Defaulting against auto loans or any kind of failure to repay the auto loan can lead to seizure of
the automobile itself.
Personal Loans:
Personal loans are unsecured in nature and hence banks don’t have any belongings of the
borrower to seize or take the ownership of. So, in this case, the bank has the authority to file a
criminal or civil lawsuit against the borrower.
 Steps to take When You are unable to Repay Your
Loan
There can be many reasons which made you unable to pay your EMIs. There can be a sudden
emergency which consumed all your money or one may have lost his job temporarily or a case of
job change can also lead to this situation. Whatever the reason is the most important fact is that
you have defaulted your repayments and actions can be taken against you. The steps one should
take when he/she defaults their loan repayments are-
Talk to the Lender
If you have a valid reason for not paying your EMIs (even though it is not allowed) talk to your
lender and ask them to consider your point. You may ask for an EMI holiday for one or two
months. Asking for more than this is a foolishness and none of the lender will agree for this. If
the case is valid the bank may accept your request but you will have to pay penalty against it.
Decrease Your EMIs
One of the reason behind defaulting an EMI can be an amount as an EMI. To avoid this situation
one can meet the lender and request them to increase the tenure period of the loan by doing so
EMI will be reduced which can help one to pay it off on time.
Debt Consolidation
Debt consolidation is one of the method by which a borrower can come out of this situation.
Debt consolidation is nothing but taking a new loan to repay all or most of the previous loan(s).
It is considered best option in this situation. But when you go for debt consolidation loan always
look for a loan in which the EMI along with the interest costs less than the total EMI you were
paying for your previous loans. Personal loan is considered good in case of debt consolidation.
The unsecured nature of the personal loan makes it easy for the borrower to avail and the high
loan amounts offered make it possible to cover all other loans.
Government bonds