Poor responses to Debenture Issue
General investors showed a
cool response to the
recently issued
debentures from two commercial banks. While there were 67 applications for the 80,000 units of debentures issued by the Nepal Investment Bank Ltd. (NIBL), the number was a mere seven for the 50,000 units of debentures issued by the Nepal Industrial and Commercial (NIC) Bank Ltd. The number of applications for 300,000 units of debentures issued by NIBL three years ago was 249.
In fact, there seems to be a trend of declining response to debentures. The first debenture issue of the banking sector was the Himalayan Bank Bond 2067 of 100,000 units in the fiscal year 2002-03 for which 705 applications were received. The second issue was in the fiscal year 2003-4 from NIBL. Similarly, in the issue of Everest Bank and Bank of Kathmandu the applicant number was 153 and 33 respectively.
There may be number of reasons why the public are showing poorer response to the debenture issue. The first reason may be the continuously decreasing interest rate. While the interest rate on the first debenture issue from HBL was 8.5 per cent, now it has decreased to 6 per cent which is equal to the interest rate on government bond. The second reason is that the public is not sufficiently aware about the debenture and its benefits such as low risk. The third reason is the expectation of an increase in the interest rate on the bank deposit with the political condition of the country coming back to normal. Fourth, it may be that the public do not believe in the banks' performances. Fifth may be the increasing number of finance companies which are offering higher interest rates on deposits. Moreover, it may be that the investors are not trying to develop a balanced portfolio with medium risk asset (debenture) and risky asset (common stock). In the present volatile market, it would be better for the investors to create a portfolio mix of the fixed income securities (debenture) and variable income securities (common stock) to minimise the total risk of investment.
In this situation, the concerned bodies should show serious attention toward the development of the debenture market, otherwise the end of the slowly growing debenture market is imminent. Similarly, the companies which are going to issue debenture in the near future should learn lessons from these issue to raise the needed fund.
