Aggressive debenture issue is giving opportunity to increase the business, but diminishing the dividend distribution capacity of Bank
Wed, Jul 24, 2019 3:56 PM on Bonds & Debentures, Featured,
Commercial banks, recently, have been issuing debentures very aggressively. The decision of NRB to hike paid up capital of Commercial Banks has increased the equity capital (Core Capital) massively in last 3 years which help banks to lend aggressively. Now most of the bank are using debt capital (debenture) to increase their capital base (Capital Adequacy) to meet their capital requirements and also another reason behind aggressive issue of debenture was the provision introduced by NRB in last monetary policy which allowed banks to consider debenture amount while calculating credit to core capital and deposit (CCD) ratio. Therefore, now the banks can collect more money to disburse loan and advances via debentures, which ultimately helps in increasing the banks’ business and profit.
Apart from the interest to the creditors (debenture buyers), banks have to make provision of reserve fund namely ‘capital redemption fund/debenture redemption fund’ each year until refund of debenture at the maturity in not done. This decreases the dividend distributing capacity of companies as the profit available for the distribution is calculated after the deduction of capital redemption fund from Net profit.
The table below lists the debentures issued by banks and the amount that needs to be separated for redemption fund.
TABLE:
| S.N. | Name of Bank | Debenture Name | Maturity Period (Years) | Face value of debenture (Rs in Cr) | Capital Redemption Fund/year(Rs in Cr) |
|---|---|---|---|---|---|
| 1 | Nepal Investment bank | 8% NIB debenture 2077 | 7 | 50.00 | 13.57 |
| 8% NIB debenture 2078 | 7 | 75.00 | |||
| 10.5% NIB Debenture 2082 | 7 | 200.00 | 28.57 | ||
| Total | 325.00 | 42.14 | |||
| 2 | Himalayan Bank Limited | 8% Himalayan Bank Limited Bond 2077 | 7 | 60.00 | 8.57 |
| 10% Himalayan Bank Ltd. Debenture 2083 (Ongoing) | 7 | 300.00 | 42.85 | ||
| Total | 360.00 | 51.42 | |||
| 3 | Nepal SBI Bank | 12.5% Nepal SBI Bank Debentures 2078 | 10 | 40.00 | 4.00 |
| 8% Nepal SBI Bank Debentures 2079 | 10 | 40.00 | 4.00 | ||
| 7.9% Nepal SBI Bank Debentures 2080 | 10 | 20.00 | 2.00 | ||
| Total | 100.00 | 10.00 | |||
| 4 | Nepal Bangladesh Bank | 10.25% NBBL Debenture 2085 | 10 | 200.00 | 20.00 |
| 20.00 | |||||
| 5 | Laxmi Bank | 8% Laxmi Bank debenture 2076 | 5 | 40.00 | 8.00 |
| 10% Laxmi Bank Debentures, 2086 (Upcoming) | 10 | 200.00 | 20.00 | ||
| Total | 240.00 | 28.00 | |||
| 6 | Sidhharth Bank | 8% SBL Debenture 2076 | 7 | 30.35 | 11.47 |
| 7.5% SBL Debenture 2078 | 7 | 50.00 | |||
| 10.5% SBL Debenture 2082 | 7 | 225.00 | 45.00 | ||
| 10.25% SBL debenture 2083 (Upcoming) | 7 | 250.00 | 35.71 | ||
| Total | 555.35 | 92.18 | |||
| 7 | Citizens Bank | 8.5% Citizens Bank Bond, 2077 | 7 | 50.00 | 7.14 |
| 8 | Sunrise Bank Limited | 10% Sunrise Debenture 2080 | 5 | 100.00 | 20.00 |
| 9 | Sanima Bank | 7% Sanima Debenture 2079 | 7 | 37.00 | 5.28 |
| 10% Sanima Debenture 2085 | 10 | 200.00 | 20.00 | ||
| Total | 237.00 | 25.28 | |||
| 10 | Machhapuchchhre Bank | 10.25% Machhapuchchhre Debenture 2085 (Ongoing) | 10 | 300.00 | 33.33 |
| 11 | NIC Asia Bank | 7.25% NIC Asia Bond 2077 | 5 | 50.00 | 7.14 |
| 9% NIC Asia Debenture 2081/82 | 7 | 300.00 | 42.85 | ||
| 11% NIC Asia Debenture 2082/83 | 7 | 183.00 | 26.14 | ||
| 10% NIC ASIA Debenture 2085/86 | 10 | 240.46 | 24.04 | ||
| 10.25% NIC ASIA Debenture 2083/84 (Ongoing Issue) | 7 | 440.00 | 88.00 | ||
| Total | 1,213.46 | 188.17 | |||
| 12 | Global IME Bank Limited | 10% Global IME Bank Limited Debenture 2075/76 | 7 | 40.00 | 5.01 |
| 10.25% Global IME Bank Limited Debenture 2080/81 | 5 | 150.00 | 30.00 | ||
| Total | 190.00 | 35.01 | |||
| 13 | NMB Bank Limited | 7% NMB debenture 2077 | 5 and 1/2 Years | 50.00 | 9.09 |
| 10% NMB Debenture 2085 | 10 | 300.00 | 30.00 | ||
| Total | 350.00 | 39.09 | |||
| 14 | Everest Bank | 8% EBL debenture 2078 | 6 | 60.00 | 12.00 |
| 8% EBL debenture 2080 | 10 | 46.88 | 4.69 | ||
| Total | 106.88 | 16.69 | |||
| 15 | Nabil Bank | 8.5% Nabil Bank Bond 2075 | 10 | 6.00 | 0.00 |
| 16 | Prabhu Bank Limited | 10% Prabhu Bank Debentures 2086 (Upcoming) | 10 | 100.00 | 10.00 |
NIC Asia Bank (NICA) is in the top of list going very aggressively in debenture issue. It has already issued debentures worth Rs 7.73 billion and the figure of ongoing debenture issue is of Rs 4.40 billion, making a total of Rs 12.13 billion. If we consider ongoing debenture issue into calculation, then NICA will need to transfer approx Rs 1.88 billion to the capital redemption reserve from its profit every year until issued debenture does not mature. This means from the total profit earned, the investors will be getting Rs 1.88 billion less in return.
In general, any bank need to transfer total debenture issue/ number of years in the capital redemption reserve, from which the bank can distribute profit only after the maturity of that particular debenture to its shareholders.
Till date, the commercial banks have already issued debentures worth Rs 38.84 billion. Similarly, new debentures worth Rs 5.5 billion will be issued in the near future making total of Rs 44.34 billion in corporate debentures.
However, this money doesn’t come for free. Banks need to pay periodic interest on debentures, which is the cost of capital. So, in total profits worth few billion will be transferred to capital redemption reserve.
Therefore, before making investment in any bank, investor should carefully look into the profit available for distribution after the transfer of profit to the capital redemption fund as it determines how much investor will be getting as the return.
Likewise, there are also a list of commercial banks who haven’t issued any debentures yet. They are:
| 1 | Standard Chartered Bank Limited |
| 2 | Mega Bank Limited |
| 3 | Civil Bank Limited |
| 4 | Janata Bank Limited |
| 5 | Nepal Bank Limited |
| 6 | Century Commercial Bank Limited |
| 7 | Prime Commerical Bank Limited |
| 8 | Kumari Bank Limited |
| 9 | Agricultural Dev. Bank Limited |
| 10 | Rastriya Banijaya Bank Limited |
| 11 | Bank of Kathmandu Limited |
| 12 | Nepal Credit and Commerce Bank |
