More commercial banks plan to bring debentures

KATHMANDU, NOV 01: 

More commercial banks are planning to issue debentures to expand their lending capacity this fiscal year. 

Everest Bank, Nepal SBI Bank and Laxmi Bank have applied for approval of debenture issues worth Rs 1.5 billion from the capital market regulator ––Securities Board of Nepal (Sebon). Sebon is yet to grant approval to any of the banks. 

Banks seek to raise funds through debt instruments to maintain the capacity to extend loans. They have to maintain a core capital of not less than six per cent of total risk weighted exposure, and total capital fund of not less than 10 per cent of its total risk weighted exposure. The debentures issued are included under Tier II capital –– supplementary capital –– of the issuing bank to increase the bank’s capacity to float more loans. 

All the banks opting to issue debentures this time have a capital adequacy ratio level of above 11 per cent. The cost of increasing supplementary capital from bond issuance is relatively lower for banks in the long run in comparison to the benefits accrued by increasing the lending capacity. 

“Banks largely go for bonds to raise necessary funds if they find their capital adequacy will be short of the prescribed limit by the central bank,” pointed out spokesperson of Nepal Rastra Bank Bhaskar Mani Gyanwali. 

In the last fiscal year too, debentures worth Rs 1.2 billion of three banks had been applied for issue approval for the very reason. Banks have taken to issuing bonds as an instrument to raise liquidity. 

Now due to declining interest rates in the money market, debt market coupon rate for bonds have also headed south. Last year, Nepal SBI Bank had offered 12.5 per cent interest and Siddhartha Bank had provided 11 per cent for their debentures of 10 years and seven years tenure, respectively. Likewise, Global Bank’s seven-year bond, issued in June, offered 10 per cent interest.

“As the interest rates are going down even for fixed deposits, the debentures’ coupon rates are also revised accordingly,” said CEO of Nabil Invest Pravin Raman Parajuli that is managing the upcoming bond issue of Everest Bank and Laxmi Bank. 

“Everest Bank offered 9.75 per cent coupon rate at the time of filing the application which might be revised by the time of the issue,” he added. 

Debentures are used by a company to borrow money from investors without collateral but with a promissory note that it will be repaid after a certain period and with a certain interest. 

Even though debenture or bond units can be traded in the secondary market, Nepse has not seen any transaction of a single bond unit since it began listing bonds. 

In the secondary market, at present, there are 13 debentures belonging to 10 companies –– nine of these are of commercial banks while the remaining one is of Nepal Electricity Authority. Corporate debentures amount to Rs 4.97 billion. 

In addition to corporate debentures, there are government bonds worth Rs 22.4 billion in the secondary market.

Source: THT