Why unsecured bonds are rising in India?

Investors in unsecured bonds rely on the financial health and reputation of the issuing company rather than asset backing. Large, well-established firms often issue unsecured bonds, and their perceived low risk of default makes these instruments attractive even without collateral

Unsecured bonds today form the backbone of India’s listed debt market, accounting for nearly two-thirds of issuances in recent years. A striking fact is that in India, the majority of these issuances (percentage-wise) come from AAA-rated public sector entities, public sector banks, and other AAA-rated private corporates.

By regulatory design, all bank bonds—Additional Tier-1 (AT1), Tier-2, and infrastructure bonds—are unsecured. This is not a choice but a requirement, as capital regulations mandate such structures for banks.

Unlike PSUs and private corporates, which issue across different maturities depending on their asset-liability management (ALM) needs, banks generally issue long-term bonds to strengthen their capital base and meet regulatory requirements.

These bonds are widely accepted by institutional investors as relatively low-risk instruments within the unsecured category. The reasons are threefold: sovereign or quasi-sovereign backing (especially in the case of PSUs and public sector banks), consistently strong credit ratings from accredited agencies, and a proven track record of repayment.

Even AA-rated private issuers issue unsecured bonds, but they usually prefer shorter maturities—often three years or less—so that investors are not locked in for long periods without repayment visibility.

The April–August 2025 dip explained

Between April and August 2025, unsecured issuances dipped to around 50% of the market. At first glance, this might look like declining investor appetite for unsecured instruments. However, the real reason lies elsewhere—banks stayed away from issuing bonds during this period.

Talking to Bizz Buzz, Venkatakrishnan Srinivasan, the Founder and Managing Partner of Rockfort Fincap explained: “Since all bank bonds are unsecured by regulatory design, their absence automatically reduced the overall share of unsecured bonds.

This dip is therefore technical rather than structural. Once banks resume their capital issuances, the share of unsecured paper is expected to return toward its earlier two-thirds level.”

A smaller segment of the market consists of unsecured bonds from lower-rated corporates. These are sometimes structured with additional features such as promoter guarantees or a limited pledge of shares, though such enhancements may not qualify as “secured” under SEBI’s legal definition.

To attract investors, these issuances typically carry higher yields as compensation for risk. But the risk is real: in case of default, unsecured bondholders rank only as general creditors.

This means their claims stand behind those of secured lenders, often resulting in negligible or even zero recovery during liquidation.

For lower-rated issuers, the market standard is that bonds should ideally be fully secured and backed by robust covenants.

These covenants may cover aspects such as promoter holding thresholds, credit rating stability, leverage ratios, profitability and earnings consistency, asset quality (GNPA/NNPA for banks, NBFCs, and MFIs), and debt service coverage ratios (DSCR). By imposing such conditions, investors gain greater protection and, importantly, early warning signals if the issuer’s financial health weakens.

MV Hariharan, exTreasury Head, SBI, noted: “While unsecured bonds are legitimate instruments for raising capital, the word ‘unsecured’ makes investors cautious about investing in them. That said, among banks, only three are systemically important (SIBs) with complete sovereign backing.

While high ratings offer implicit certainty of security, ratings too are ephemeral—reflecting market conditions and subject to frequent reviews and revisions. Furthermore, the slightly lower-rated unsecured offerings are often subject to such onerous conditions that they fail the test of being truly unsecured.”

Thus, while investors may feel reassured, this dichotomy in offerings—backed by regulatory authority and mandates—can end up confusing potential investors, even with shorter time horizons.

The status of unsecured creditors has been clearly explained: recovery in case of default is limited. If two-thirds of the market relies on such funds, it also holds up a mirror with manifold implications.

Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors, added: “Unsecured bonds are rising in India due to lower interest rates, increased regulatory support, and a shift away from traditional bank lending. They are attractive for companies seeking flexible financing and for investors looking for higher yields and diversification opportunities.”

The Reserve Bank of India’s consecutive repo rate cuts have reduced borrowing costs and benchmark yields. Corporates now find unsecured bonds an appealing way to raise funds at competitive rates, often offering investors better returns compared to fixed deposits or government securities.

Recent SEBI regulations and RBI guidelines have streamlined bond issuance, improved transparency, and built market trust—making corporate bonds, including unsecured ones, easier to issue and more accessible to a wider investor base.

Measures such as unified KYC systems, digital bidding, and stronger disclosure norms have reduced procedural overhead and encouraged broader participation.

Post-pandemic, Indian banks have adopted stricter lending standards. Coupled with the trend of financial disintermediation, this has driven companies to seek capital directly from the bond market. Unsecured bonds can be easier and faster to structure than traditional secured bank loans, adding to their appeal for corporates.

Unsecured bonds are attractive because they offer higher yields to investors and greater flexibility to issuers, making them a compelling choice for those willing to accept more risk in exchange for potentially better returns.

They typically pay more than secured bonds and government securities, compensating investors for lack of collateral. This yield premium attracts those seeking better returns from their fixed-income portfolio.

They also serve as effective tools for diversification, providing exposure to different corporate issuers and sectors. Since they have low correlation with equities, including unsecured bonds can help stabilise returns and reduce overall portfolio risk during market volatility.

Investors in unsecured bonds rely on the financial health and reputation of the issuing company rather than asset backing. Large, well-established firms often issue unsecured bonds, and their perceived low risk of default makes these instruments attractive even without collateral.

Companies can issue unsecured bonds quickly and efficiently without the need to pledge assets, allowing greater fundraising agility—especially for established corporates. This is particularly helpful when they have strong credit ratings and established market reputations.

Unsecured bonds allow companies to mobilise funds from diverse investors beyond traditional bank loans, often at competitive rates in favourable markets.

With fintech and digital platforms enabling easier access and evaluation of bond investments, demand for unsecured instruments is rising, driving liquidity and cementing their role in India’s debt market.