Certain regulatory changes could enable banks, insurance companies and pension funds to tap the corporate bond market further and widen its appeal among investors.

Speaking at an Assocham organised event on Thursday, Sebi wholetime member G. Mahalingam said changes such as the inclusion of corporate bonds as part of eligible assets under Statutory Liquidity Ratio (SLR) and as collaterals under RBI’s liquidity adjustment facility (LAF) could create a ready market for these bonds.

SLR is the percentage of total demand and time liabilities that banks have to keep in certain specified assets, including cash, gold, treasury bills, dated government securities and state development loans.

LAF is a facility extended by the RBI to scheduled commercial banks to avail liquidity or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of G-Secs, including SDLs.

“While Basel guidelines provide for AAA -rated bonds to be included, today the banks are flooded with government bonds. So, they hardly ever take this as part of the liquidity coverage ratio. This mentality has to change,” Mahalingam said.

Insurance companies and pension funds whose liabilities extend over a longer period of time can also consider investing in high rated corporate bonds. “Insurance companies have a liability profile which extends over a space of time. So, they are well positioned to take this kind of risk,” he said.

Development of corporate bonds could play a key role raising capital at a time when banks are finding it difficult to extend long term credit due to asset liability mismatches and overburdened by stressed assets overhang.

For the quarter ended June, the net outstanding amount of corporate bonds was Rs 3627667.18 crore.

“I think there are quite a few things which need to change and if these changes do not take place, we cannot really hope that the corporate bond market is going to gain traction,” Mahalingam said.