Mumbai: India's plans to expand its corporate bond market are running up against a yearlong credit crisis, in another obstacle for Prime Minister Narendra Modi's efforts to jumpstart a sputtering economy.

Sales of rupee bonds rated below AAA have halved so far this year to Rs 699 billion ($9.7 billion) as a wave of debt defaults and a funding crunch in the shadow banking sector make investors reluctant to buy riskier notes. Banks, who are major players in the primary market, are now mostly interested in providing backing for sales of quasi-sovereign and top-rated issuers, Bloomberg-compiled data show.

Opening up India's corporate bond market to more issuers and investors is an important part of Modi's pledge to develop a $5 trillion economy by 2024, from $2.7 trillion now, as it will give companies more opportunities to raise funds to spend. But the nation's credit crisis is impeding changes to the rupee bond market, which has operated like a cosy club consisting largely of a few big local banks and brokers doing deals based on long-standing relationships. The slowest growth in India's economy since 2013 also makes it harder for companies seeking funds.

"Underwriting for lower-rated issuers has been a challenge," said B. Prasanna, Group Head for global markets sales, trading and research at ICICI Bank. "Given the current scenario, post the credit defaults, banks have become conservative" in taking on new bond deals because it's taking longer to sell down notes to other participants, he said.

Lower-rated issuers are responding by tapping alternative sources of funding, such as borrowing overseas, utilizing unused bank lines and selling bonds to individual investors, Prasanna said. But that increases their overall funding costs, he said.