Debentures offering low rates

KATHMANDU:

Of late, the rates offered by corporate debentures have shrunk, as evident by the upcoming issue of Nepal SBI Bank, which will provide less than eight per cent for its 10-year bonds.

Nepal SBI Bank is going to issue ‘Nepal SBI Bank Debenture 2070’ worth Rs 200 million at par value of Rs 1,000 at 7.9 per cent interest rate. The coupon rate offered for the debentures have slumped following the lowered rates in the financial market. The lending rates in the liquidity-flush financial sector have plunged nearly 11 per cent at present with short-term rates staying below one per cent. Moreover, growing deposit but waning credit demand has also shrivelled the number of debenture issues.

Last year, during this period, three commercial banks had launched debenture issues worth Rs 1.2 billion. However, this is the first debenture issue of the year so far.

The primary reason for a bank to raise funds through debt instruments such as debentures is to maintain its capacity to lend. The debentures issued are included under Tier II capital — supplementary capital — of the issuing bank, thereby increasing its capacity to float more loans.

This time, banks are struggling with excess funds that are cooped up in the banks’ vaults, yielding nominal returns. Hence, banks do not have much reason to borrow from the public by issuing bonds.

Last fiscal year, a total of seven debentures worth Rs 10.6 billion were issued by seven commercial banks, with interest rate varying between eight per cent to 11 per cent. Likewise, in fiscal year 2011-12, debentures worth Rs 1.2 billion of three banks had hit the market. These debentures offered more than 10 per cent interest.

As the market became flush with funds, two commercial banks — NIC Asia Bank and Citizens Bank International — which had obtained credit rating for their bonds last year have yet to offer them for sale.

Icra Nepal — the credit rating agency — has assigned a rating of [ICRANP] LAA to Nepal SBI Bank’s bonds. According to the agency, the rating is considered to have a high degree of safety regarding timely servicing of financial obligations with very low credit risk.

Source: THT