Banks are in a rush to issue corporate bonds to fortify their balance sheets and improve their leverage ratios in line with the regulatory requirements.
Corporate bond is a debt security issued by a corporation and sold to investors, which usually increases the payment ability of a company from its future operations.
More than half of the 30 listed banks so far planned to issue at least Tk4,000 crore worth of bonds to implement Basel II, according to Dhaka Stock Exchange.
Bangladesh entered the Basel II capital regime, a version of risk-based capital standards set for banks worldwide, on the first day of 2010, which ultimately will be fully effective from January 2015.
Only three banks have planned to issue rights offer, which has traditionally been the bread and butter for the banks’ source of funding.
The rest 10 out of total 30 listed banks is yet to decide any option to implement capital adequacy ratio (CAR) and minimum capital requirement (MCR) in three phases under Base-II.
“The scenario has changed with the financial market coming up with diversified options,” said Ali Reza Iftekhar, EBL managing director and chief executive officer.
His bank plans to issue “EBL Subordinated Bond” up to Tk250 crore for raising Tier-II capital subject to approval of the regulator.
Iftekhar said issuance of corporate bond that is now available in the market has relatively better advantage than offering rights or bonus shares.
“Raising fund by issuing rights or bonus shares directly goes to Tier-I capital, which swells paid up capital. But more paid up capital means less capacity to offer dividend,” he said.
On the other hand, fund raised by issuing bond indirectly ads to the paid up capital and also comply regulatory requirements, he said.
Tier-I capital is composed of equity capital and retained earnings, while tier II is supplementary capital, and tier III is short-term subordinated debt covering market risks.
Universal Financial Solutions (UFS) managing director and chief executive officer Sayed Aminul Kabir said conditions in financial markets had been improving steadily since mid-2012.
“The market has come up with diversified products with cost effective way, which is a lift in bond issuance,” Kabir said.
He said there are alternative ways like issuing rights shares. However the process takes time as compared to bonds that can be issued within much shorter span of time.
UFS is currently working as sole arranger for Trust Bank and Jamuna Bank to issue bonds worth Tk400 crore.
Under the Basel-II, the scheduled banks will have to increase CAR at least to 10% and MCR to 10% of a bank’s risk weighted asset by 2015.
The Basel II accord has been prepared on the basis of three pillars – minimum capital requirement, supervisory review process and market discipline. And three types of risks – credit risk, market risk and operational risk – have to be considered under the minimum capital requirement.
Basel III, the upgraded version of recommendations on global banking laws and regulations, is preparing to phase in Bangladesh from 2015.
