Why Unsecured Bonds are rising in India?

Mumbai, Sep 10

Unsecured bonds today form the backbone of India’s listed debt market, making up 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 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 come to the market with 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, Founder and Managing Partner of Rockfort Fincap says, “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, he said.

For lower-rated issuers, the market standard is that bonds should ideally be fully secured and backed by robust covenants. These covenants may cover a range of 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 or if covenant breaches occur.

MV Hariharan, ex-treasury head, SBI says, “While unsecured bonds are legitimate instruments for raising precious capital, the word " unsecured" makes the investors quite cautious about investing in them. That said, there are, among banks, only 3 which are SIBs or systemically important banks, having complete sovereign backing. Therefore, while the highest ratings are attractions of the implicit certainty of security, ratings too are ephemeral, supposedly reflecting market conditions and subject to frequent reviews and revisions. Furthermore, the slightly lower unsecured & rated offerings are apparently trussed up by such onerous conditions that they fail the test of being actually unsecured.”

So, while the investors might be a bit more reassured, such dichotomy in the offerings, while claiming regulatory authority and mandates can end up confusing potential investors, even with shorter time horizons. The status of such unsecured creditors too has been explained by the author which is quite clear on the recovery of the investment. If 2/3rds of the market is gorging on such funds, it's also showing up a mirror with manifold implications.

Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors says, “Unsecured bonds are rising in India due to lower interest rates, increased regulatory support, and a shift away from traditional bank lending, making them 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 find unsecured bonds an appealing way to raise funds at competitive rates, often offering investors better returns compared to fixed deposits or government securities, he said.

Recent SEBI regulations and RBI guidelines have streamlined bond issuance, improved transparency, and built market trust, making corporate bonds—including unsecured—easier to issue and more accessible to a wider investor base. Measures like unified KYC systems, digital bidding, and disclosure norms have reduced procedural overhead and encouraged broader participation.

Indian banks have adopted stricter lending standards post-pandemic, which, coupled with the trend of financial disintermediation, is driving 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.

Indian corporates now generally have stronger financials, healthier margins, and better governance—supporting issuer credibility even without collateral. The implementation of insolvency frameworks adds confidence for bond investors.

Fintech and digital platforms enable retail and institutional investors to easily access and evaluate bond investments, boosting demand for unsecured instruments and driving liquidity

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.

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

They 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 stabilize 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 as collateral, 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 mobilize funds from diverse investors beyond traditional bank loans, often at competitive rates in favorable markets in the fixed income.

EoM.