Commercial banks are leaning towards debentures to collect capital due to their growing attraction among investors. The Securities Board of Nepal has permitted six commercial banks to issue debentures worth Rs15.58 billion from mid-July 2018 to mid-March this year. The debt instrument has a maturity period of 5-10 years.

Debentures, also known as corporate bonds, are a debt instrument that companies listed on the Nepal Stock Exchange can issue to raise capital. The companies issue the low-risk instrument that yields a fixed return for investors, mainly to manage working capital.

Among the banks receiving the regulator’s go-ahead, NIC Asia Bank recently made the largest offering of debentures valued at Rs5.83 billion.

The debentures have an interest rate of 10 percent per annum. NMB Bank, Siddhartha Bank, Sanima Bank, Global IME Bank and Sunrise Bank are preparing to issue debentures.

Nepal Investment Bank and Nepal Bangladesh Bank have applied for permission to issue the debt instrument. These financial institutions plan to raise Rs2 billion each. The two banks have proposed to issue 2 million units at Rs1,000 apiece.

Nepal Investment Bank debentures bear interest at the rate of 10.50 percent per annum and will be due in seven years. Nepal Bangladesh Bank’s debentures have an interest rate of 10.25 percent per annum and will mature in 10 years.

According to the Securities Board of Nepal, the number of listed companies wanting to issue debentures has gone up this fiscal year. “This might be because of a shortage of loanable funds with banks,” said Nabaraj Adhikari, deputy executive director of the board.

Over the past one year, banks have been grappling with a liquidity shortage, a situation attributed mainly to aggressive lending amid slow deposit collection. “Banks might be eager to issue debentures to raise money to invest in government bonds as part of their portfolio management,” said Adhikari.

With share prices down due to a bearish trend in the stock market, investors are expected to seek refuge in debentures. Despite the government’s commitment to allow trading of debt instruments too in the secondary market, this has not happened.