Debentures

Why Debentures Matter

Debentures allow organisations to raise large sums of money without giving up ownership. In 2024–2025, the Government of India raised ₹72,718 crore through debentures to fund infrastructure projects. For investors, debentures provide steady returns. For example, government bonds maturing in 2029 offer 7.04%, while corporate debentures currently pay 8–12%, which are higher than most fixed deposits. From the borrower’s perspective, debentures help manage large debts by spreading repayments over longer periods. The government’s total debt of ₹183.67 lakh crore is balanced with an average repayment term of 18 years, reducing the need for constant refinancing.

Risks to Watch

Debentures depend heavily on the issuer’s credit strength. In 2024, defaults by certain non-banking financial companies (NBFCs) led to losses of around ₹15,000 crore for debenture holders. Interest rates also pose a risk. When the RBI raises rates (currently 6.5% as of December 2024), the value of existing debentures drops. A 0.5% rate hike can reduce a 10-year bond’s value by 4–6%. In the event of insolvency, debenture holders rank below secured creditors. On average, they recover only 25–40% of what they are owed if a company collapses.

How to Manage Debenture Investments

Balance your portfolio by holding a mix of short-term (3–5 years) and long-term (10+ years) debentures. For example, combining 7.1% 2027 bonds with 6.5% 2035 bonds helps manage cash flow and reduces reinvestment risk. Keep an eye on economic signals. RBI’s inflation target is 4.5% for 2025, and large foreign inflows (₹1.05 lakh crore via global bond indices) can influence interest rates and bond performance. Always prioritise high-quality issuers. Companies like L&T Finance offer AAA-rated debentures with 9.2% returns on 2030 bonds, making them more secure than lower-rated options. For borrowers, debentures can replace expensive loans. Swapping a 14% NBFC loan for a 9–10% debenture can save ₹4–5 lakh annually for every ₹1 crore borrowed.

Final Thoughts

Debentures play a vital role in India's ₹187.35 lakh crore debt market. They provide structured, long-term funding for projects and stable returns for investors. However, they require careful monitoring of credit ratings, interest rates, and economic trends. With a smart strategy, debentures can balance risk and reward, helping both investors and borrowers manage financial growth sustainably.