My Republica, July 26, 2019
Undersubscription could compound woes, say bankers
KATHMANDU: Commercial banks will have to float nearly Rs 62 billion worth of debentures in the current fiscal year to meet the new requirement introduced by the Nepal Rastra Bank (NRB) through its monetary policy.
According to the new measure introduced in the monetary policy for FY 2019/20 released by the NRB on Wednesday, commercial banks must issue debentures equivalent to minimum of 25 percent of its paid-up capital by mid-July 2020.There are 28 commercial banks with a total paid-up capital of Rs 248.51 billion as of mid-June, according to the NRB data. This means they must issue debentures worth Rs 62.25 billion. As some of the commercial banks have already issued debentures in recent years, the actual amount of debentures could be lower.
According to Securities Board of Nepal, 11 commercial banks have already received the go-ahead from the securities market regulator to issue debentures worth Rs 29.98 billion.
NRB officials say that the new arrangement will help to ease the shortage of lendable fund in the banking system and lower skyrocketing interest rates. According to the central bank, banks will not have to include the debentures in the core capital plus deposit (CCD) ratio, allowing them to disburse all the funds collected through debenture schemes as loans. This flexibility is expected to ease, to some extent, acute shortage of lendable funds resulting from the saturation of the CCD ratio - a prudential lending limit set by the NRB.
As CCD ratio of most of the banks is hitting the upper limit of 80 percent, they have been facing shortage of funds to float new loans. The aggressive lending approach taken by banking institutions has worsened the shortage of lendable funds in banking system. Even when deposits did not grew much, banks continued to disburse loans at a pace that they reach a level where they do not have adequate funds to lend more. Worried about the shortage of funds, they started to raise interest rate to attract deposits. The competition among banks to offer higher deposit rates also drove lending rates to an ultra-high level.
By setting the minimum requirement for debentures, the NRB is prodding banks not only to diversify their sources of funds, but also help increase instruments in the secondary market which is dominated by stocks, say NRB officials. “While debentures will help to address the asset and liability mismatch, which has been a cause of high interest rates, this will diversify the source of funds for BFIs who largely rely on deposits,” Gunakar Bhatta, an executive director at the NRB, told Republica.
The NRB introduced the new provision in line with a recommendation made by a five-member committee formed by the Ministry of Finance (MoF) in December last year to look into high interest rates and stock market volatility. The committee led by deputy governor Shivaraj Shrestha had recommended that the government and the central bank encourage banks to issue debentures and bonds to develop securities market and stabilize the secondary market.
However, bankers say that the new requirement to issue debentures is not the correct treatment for the current problem. “Banks have been issuing debentures based on their business need and plan. However, making it mandatory only adds woes for the banks rather than resolving the shortage of lendable fund,” said a banking executive, requesting anonymity. “Banks, which have floated debentures, are having hard time in selling them in the market despite offering double-digit interest rate as they are not traded much in the secondary market,” he added. "If this undersubscription continues, how will banks be able to meet the requirement? It will create another problem for banks instead of addressing the shortage of lendable fund or rising interest rates."
Some debentures issued by banks have remained unsubscribed. NRB officials, however, say banks who cannot meet the regulatory requirement have an option to go for merger.“If banks cannot sell their debentures, it could mean they are not well-rated, or investors and public perceive risks on their instruments. To become stronger and meet the regulatory requirement, they can go for merger which is one of the implied interest of the central bank,” Bhatta, who also heads the NRB's Research Department, added.
'Meet regulatory requirement or pursue merger' -Gunakar Bhatta, Head, Research Department, NRB
There are five major reasons behind introducing this new requirement.
First, it will help in giving more liquidity to banks. As the entire fund mobilized through debentures can be disbursed as loans, it will help to ease shortage of lendable fund in the banking system. Instead of relying on deposits for funding, banks will have to improve liquidity situation by issuing other debt instruments.
Second, as the debentures will be of long-term with fixed interest rates, this can minimize asset and liability mismatch which has been a reason for shortage of lendable fund and rising interest rates. When banks start mobilizing certain percent of deposits of long-term maturity, they will have a better liquidity management capacity.
Third, it will help to bring interest rates stability. When the interest rates are fixed for a certain period, we can expect interest rates to remain stable. Over the period, there will be a correction in interest rates that have remained on a higher side for past couple of years.
Fourth, this provision will also offer a respite to our volatile secondary market. As the secondary market has been dominated by stocks, investors will have another instrument in the market to trade. When there are more instruments, including this debt instrument, the stock market is less prone to volatility driven by shares.
Fifth, we want banks to get more scrutinized from the public also. When banks have to issue debentures, their rating should be better. Investors, as well as general public, will invest only in instruments where risk is lower. Mandatory provision to issue debentures also leads to the private monitoring of banks in addition to regulatory supervision. Banks failing to meet this requirement should find a partner for merger. So, this tool is part of our effort to create an environment or compel banks to go for consolidation.