Banks race to issue debentures to reduce reliance on deposits

Published On: March 28, 2019 08:28 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, March 28: Many banks are opting for debenture as an instrument to collect funds as part of their efforts to address the shortage of lendable fund. 

The rush to issue debentures to public and private placement in recent months is an indication that banks are reducing their reliance on deposits as the source of funds, say experts. 

Data compiled by the Securities Board of Nepal (Sebon) shows that half a dozen commercial banks have got approval to issue debentures in Fiscal Year 2018/19, while two are awaiting the stock market regulator’s nod to float the alternative instrument for funding.

Sebon approved applications of six commercial banks to issue 15.58 million units of debentures in the current fiscal year alone. These banks plan to mobilize Rs 15.58 billion from the issue. Some of them have already floated the debentures, while others are in the process of floating. Each unit of the debenture has been priced at Rs 1,000 with an offer of double-digit interest rate. Banks are offering 10-10.5 percent interest rate on debentures.

The growing interest of banks to mobilize funds through debentures also comes in the wake of the central bank’s decision to allow them to take into account such funds while computing credit to core capital cum deposit ratio.  NRB allowed such facility to banks through the Monetary Policy for Current Fiscal Year 2018/19. 

As many banks are struggling to keep their CCD ratio within the regulatory requirement of 80 percent, they have found debentures an option to meet the shortfall and reduce stress on the CCD ratio.

“As most of the deposits are of short-term nature and banks have to lend for longer term, debentures that hold long-term maturity help them to address such mismatch,” Ashok Sherchan, the CEO of Prabhu Bank Ltd, told Republica. 

Prabhu Bank Ltd is the latest bank to jump on the debenture bandwagon. The bank began the process of floating debentures worth Rs 1 billion on Wednesday, offering interest return of 10 percent.
Sherchan said that debentures also help to keep the skyrocketing interest rates on check. “As the interest rate on debentures remains fixed, it helps to make interest rates stable,” he added.
As these debentures also get listed on the stock exchange, those holding these instruments can liquidate them in the secondary market. 

NIC Asia Bank Ltd, Sanima Bank Ltd and Siddhartha Bank Ltd are the commercial banks that have received approval in the current fiscal year to float their debentures. Similarly, the Sebon has also approved applications of Global IME Bank Ltd, NMB Bank Ltd and Sunrise Bank Ltd to float their respective debentures. 

Meanwhile, debentures of Nepal Investment Bank Ltd and Nepal Bangladesh Bank Ltd are in the pipeline, according to the Sebon

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