Debenture issues adversely affected by liquidity shortage in market; two under-subscribed, two ready to issue and two more in pipeline

Wed, Jan 16, 2019 12:33 PM on Bonds & Debentures, Exclusive, Stock Market,

-Aakriti Thakali

In the simplest terms, Debentures are debt instruments issued by corporate bodies or organizations, which is not secured by physical assets or collateral but rather the general creditworthiness of the company that is issuing it.

The Monetary Policy of this Fiscal Year had let the BFIs include long-term credit instruments and bonds in Credit to Core Capital cum Deposit (CCD) ratio. Prior to this, they had to maintain 80% CCD ratio, which basically means that if the bank has Rs. 100 as deposit and core capital, it can only lend only Rs. 80.

After the introduction of this provision, many commercial banks issued debentures to collect cash/loanable funds. However given the shortage of loanable funds in the market, these debentures issues were affected. Despite the attractive interest rates, many issues had a hard time getting fully subscribed.

According to the rule, out of the total issue amount, the company should separate 20% for General public and the remaining 80% for private placement. And from the 20% separated for the public, 5% is allocated for Mutual Funds. For the Fiscal Year 2075/76, the following Debenture issues were approved by the Securities Board of Nepal (SEBON).

Sanima Debenture

Sanima Bank had issued Rs. 2 Arba worth of Debentures for a period of 10 years at 10% interest. The issue has already closed but it wasn't fully subscribed.

Out of the total 40 crores separated for Public, Rs 38 crore worth of Debenture was for General Public and the other Rs 2 crore was for Mutual Fund. The Rs 2 crore was fully subscribed by Citizen Mutual Fund. However, from the side of General public, only 1,190 applications were received applying for Rs 8 crore 22 lakh and 12 thousand.

Similarly, on the private placement side, only 17 applicants were received applying for Rs 1 arba 25 crores 25 lakh worth of debentures. Among the 17 applicants, Rastriya Beema Sansthan (RBS) and Life Insurance Corporation (LICN) had applied for Rs 25 crore each.

Totaling both the public and private applications, out of Rs 200 crores, Sanima Debenture has received a total of Rs 1 arba 35 crores 47 lakh and 12 thousand, while 6 lakh 45 thousand 288 units or 32.26% of the issue is still unsubscribed.

Siddhartha Debenture

Siddhartha Bank had also issued Debentures worth Rs 2.25 arba at 10.5% for a period of 7 years. Like Sanima's, it is also not fully subscribed yet.

According to the rule, Rs 180 crore was for Private placement and Rs 45 crore for the Public Placement of which Rs 2.25 crore was for Mutual Funds. However, Mutual Funds didn't apply for it and from general public 704 applications worth Rs 5 crore 75 lakh 59 thousand was received.

Similarly, from Private placements 22 applications worth Rs 2 arba 10 crore 50 thousand was received, Citizen Investment Trust (CIT) being one of the biggest applicants. Out of Rs 225 crore, Siddartha Debenture was able to collect Rs 216.25 crore or 21,62559 units. So, a total of 3 lakh 37 thousand 441 units or 13.5% is not subscribed.

Similarly, as you can see in the table, the debenture issue of Global IME Bank (GBIME) and NIC Asia Bank (NICA) has already been approved by SEBON. So, the issue will be open soon. Both the issues will be providing 10% interest rate with a maturity period of 5 and 10 years for GBIME and NICA respectively.

Given the current market conditions and prevailing agreements, you can earn 8.5% for institutional fixed deposits and 9.25% for personal fixed deposits in banks. These interest payments are mostly quarterly and the negotiation room for the interest rate is 0.5% for individual and 1% for institutional deposits.

Similarly, Sunrise Bank (SRBL) is also going to issue debenture worth Rs 1 arba at 10% interest rate once the approval is granted by SEBON. Joining the list, Nepal Investment Bank (NIB) is also moving forward with debenture worth Rs 2 arba at 10.5%.

Since the banks need to maintain a minimum Capital Adequacy Ratio (CAR) of 11%, more banks may issue debenture in the days to come.