Bank-Centric to Corporate Bond-Based Finance | 19 Feb 2026

Source: TH 

Why in News? 

The Union Budget 2026-27 has introduced several financial sector reforms aimed at deepening India's corporate bond market and reducing the structural burden on banks.  

• These measures implicitly acknowledge that Indian banks are shouldering risks which, in mature economies, are absorbed and distributed by well-developed financial markets. 

What Reforms have been Introduced to Deepen Corporate Bond Market in the Union Budget 2026-27? 

• Market-Making Framework: Establishes designated intermediaries to provide continuous two-way quotes (buy and sell) for corporate bonds, supported by improved access to funding and derivatives on bond indices. 
• Total-Return Swaps (TRS): Introduces synthetic trading tools allowing investors to gain exposure to a bond's total return (interest plus price changes) without owning the underlying asset, facilitating risk hedging. 
• Bond-Index Derivatives: Broadens participation and supports risk management through derivatives on corporate bond indices, contributing to greater fixed-income market depth. 
• Infrastructure Risk Guarantee Fund: Provides prudently calibrated partial credit guarantees to lenders during infrastructure project development and construction phases. 
• CPSE Asset Monetisation: Accelerates capital recycling by unlocking significant underutilised real estate holdings of Central Public Sector Enterprises (CPSEs) through dedicated Real Estate Investment Trusts (REITs). 
• De-risking Infrastructure: Strengthens private developer confidence, improves project bankability, and reduces financing hurdles to encourage private participation in high-risk segments. 

What are the Key Challenges Faced by Banks due to Shallow Corporate Bond Market Penetration? 

• Structural Overburden of Risk: Banks are forced to act as the default warehouse for credit risk due to the absence of a deep corporate bond market, carrying roughly 60-65% of all non-financial corporate debt compared to 30% in the US. 
• Extreme Asset-Liability Mismatch: Banks are expected to finance long-gestation infrastructure projects (highways, power plants) using short-term deposits, increasing systemic vulnerability to shocks. 
• Recurring Fiscal Dependency: The accumulation of private-sector credit losses has necessitated massive public recapitalisations (over Rs 3.2 lakh crore since 2017), effectively transferring private losses onto the public balance sheet. 
• Constrained Lending Capacity (Opportunity Cost): Capital tied up in long-term corporate loans reduces the availability of funds for productive sectors like small and medium enterprises (SMEs), exporters, and first-time borrowers, even after capital clean-ups. 
• Impaired Monetary Policy Transmission: Burdened by long-term credit exposures, banks are reluctant to adjust rates smoothly—hesitating to pass on higher costs or constrained from fresh lending when rates fall—distorting the transmission of policy signals. 

What  Steps are Further Needed to Deepen Corporate Bond Market in India? 

• Create a Corporate Bond Repo Market: Establish a dedicated, centrally cleared repo market for corporate bonds, allowing holders to borrow against their bond portfolios. This would transform corporate bonds from "buy-and-hold" instruments into active collateral, dramatically improving liquidity and enabling leveraged trading strategies. 
• Introduce "Greenium" Incentives for ESG Bonds: Offer regulatory incentives such as lower listing fees, faster approval pathways, or lower reserve requirements for banks investing in certified green corporate bonds. This would tap into global ESG demand and create a differentiated, liquid green corporate bond segment. 
• Mandate "Bond-Only" Project Finance for Infrastructure: Gradually mandate that a fixed percentage (e.g., 20-30%) of new infrastructure project financing must be raised through public bond issuances rather than bank loans. This would force issuers to create market-disciplined, rated, and tradable instruments from the project's inception. 
• Launch a "Corporate Bond Credit Default Swap (CDS)" Index: This would allow investors to hedge broad market risk or take views on the corporate credit cycle without picking individual bonds, attracting a new class of macro-oriented investors. 
• Create Retail-Focused "Corporate Bond Savings Certificates": Design a simple, low-denomination corporate bond product with tax benefits (similar to tax-saving fixed deposits) but linked to a diversified pool of highly-rated corporates. This would directly channel household savings into corporate debt while creating retail demand pull. 

Conclusion 

Budget 2026 marks a critical shift toward addressing India's over-reliance on banks for long-term finance. By deepening the corporate bond market through innovative financial instruments and risk-sharing mechanisms, these reforms aim to build a more resilient financial architecture. Success will depend on sustained implementation and broadening participation across retail investors and foreign investors.