Country's bond market deserves priority attention

PANELISTS

Mr. Shamsul Huq Zahid

Editor and CEO

The Financial Express

Event Chair

Ms. Farzana Lalarukh

Commissioner

Bangladesh Securities Exchange Commission

Chief Guest

Dr. Najmus Saydat

Jt Secretary

Financial Institution Division

Ministry of Finance

Mr. Istequemal Hussain

Director, Bangladesh Bank

Mirza Mohammad Mamun Sadat

First Secretary (Tax Policy), NBR

Ms. Mazeda Khatun

President

Bangladesh Merchant Bankers' Association

Mr. Nahid Ul Islam

Deputy CRO, Dhaka Bank

Syed M Omar Tayub

Director and CEO

Prime Investment Ltd.

Kazi Farhan Zahir

Senior Country Officer

International Finance Corporation (IFC)

Mr. Bidyut Kumar Saha

Senior Investment Officer, Asian Development

Bank (ADB)

Dr Prashanta Kumar Banerjee

Professor, Bangladesh Institute of Bank Management (BIBM)

Syed Rashed Hussian

CEO of BRAC EPL Investment

Event Moderator

Salient features of the keynote speech

Mr Tanzim Alamgir

CEO at UCB Investment Ltd.

The ratio of the Bangladesh corporate bond market to GDP is only 0.19 per cent, the lowest among peer countries.

Overarching measures required to popularize bonds: (1) promote comprehensive wealth management (2) increase the number of mutual funds (3) revamp tax incentives (4) enhance flexibility in bond rate (5) ensure vigilant oversight beyond bank guarantee (6) enhance data transparency (7) ensure accountability of other stakeholders (8) make bonds accessible (9) create fair transaction fees.

Awareness -- the game changer: proposal to regulators and stakeholders to revamp bond market

Bangladesh Bank: (1) introduce credit rating-based risk weight for banks as investors (2) revoke sinking fund and SPV requirement for corporate bonds (3) allow demand-supply-driven bond rate (4) allow banks to provide liquidity support against their bonds.

Task for BSEC: (1) continue existing fast process for bond approval (2) take a more vigilant approach to ensuring accountability (3) continue current intensity of punishment (4) include other stakeholders in the punishment.

Dos for NBR: Extend tax benefits to all types of bonds, including targeted incentives for insurance companies.

IDRA ought to clarify the ambiguity in existing rules and increase the investment limits for bonds.

Banks have to adopt wealth management for fee-based income.

Auditor, credit rating, valuer, trustee, issue manager, arranger have to ensure accountability.

It is time to fix the base and regulations in line with the global best practices to promote corporate bond once the yields of the treasury bonds come down below 8.0 per cent.

Ms Farzana Lalarukh

The country's debt market has yet to flourish as the equity market remains underdeveloped.

Both the debt market and equity market will have to be developed side by side.

Investors would not face the worry about state of the equity market if the debt market could be developed.

Any loss incurred on the equity market can be offset with the returns derived from fixed-income securities.

Both the companies and investors must have a debt -equity ratio. So, investors need to realise this basic investment- and financial literacy is important there.

"We are framing separate rules for IPOs, and the equity market and bond market.

We are dealing with equity and debt securities separately. Our target is to reach the action plans along with the stakeholders.

We want investments in bonds from mutual funds, asset- management companies and stockbrokers.

For approvals, requirements will be set once and issuer and issue manager will have to come together to address the loopholes in the proposals.

We held meetings with the IFC and the World Bank and now we are in an advanced stage of framing rules and regulations for orange bonds and sustainability."

Dr Najmus Saydat

The government is not capable alone to meet the financing requirement for infrastructure development. "We need alternative instruments, including bonds. We can walk a long way if the problems of long -term financing are addressed once. The problems of the equity market are the matters of concern. Apart from ensuring the infrastructure of the bond market and governance, the active role of relevant parties, including trustees, issuers and auditors, and proper guidelines are important for a thriving bond market.

The role of the regulators is also important in the market economy and that's why the central bank and the securities have much to do for the development of both the debt market and equity market.

Istequemal Hussain

Investors will follow the rates of bonds. Treasury bonds have come under a platform through their listing with the bourses.

"We are creating investors' base offering the scope of purchasing bonds as much as an investor wants, overlooking the rules and regulations in an effort to make vibrant the market."

In case of promoting the corporate bonds, the leadership should come from the securities regulator.

If there is no liquidity on the secondary market, the bond market will face difficulties.

The market of corporate bonds has to be built first and the coupon rates must be competitive as the customer ultimately will go there where there are good rates

"We are thinking about the introduction of standalone PD for the government bonds to create competitiveness in the market.

In the case of corporate bonds, we can think about standalone investment entities who would work as pressure groups with the banks to create demands of corporate bonds.

Mirza Mohammad Mamun Sadat

The National Board of Revenue (NBR) has to work taking the revenue collection into consideration.

"We understand that national development should get priority compared to tax collection. Many positive changes will be visible after June this year. Now we need to popularize the bond market as it's another source of internal resource mobilisation.

We can facilitate the growth of the bond market through tax incentives. We also expect a formal proposal so that the NBR can consider tax exemption or rebates for the development of the debt market. We will try to consider rational proposals from experts and stakeholders."

Mazeda Khatun

The nascent stage of the bond market indicates there is a huge scope of utilizing the capital market for long -term financing and the capital market should be prioritized there. A coordinated effort by the government, the regulators of both the money market and capital market is urgent to facilitate development of the bond market.

The revenue board should have intensive plans to popularise the bonds among issuers and investors. There is a lack of awareness regarding bonds among people working at government and semi-government and local -government offices. Awareness programmes should be arranged at

those places.

Nahid Ul Islam

The risk-weighting rules for bonds and loans under Basel III encourage banks to assess the tradeoffs between risk, return, and capital requirements while deciding whether to invest in corporate bonds or provide loans to companies. And in the current context, from a risk-management perspective, it is more feasible to provide loans to a high-rated corporate than to invest in bonds.

If the central bank approves the RWA (risk-weighted

asset) rules as per Basel Guidelines for Bond i.e bank can calculate the RWA as per bond's ratings, the cost of capital will be reduced, bond investment will be more attractive for banks. Also, a vibrant ATB or alternative trading board will help increase buyers who easily will be able to liquidate their debt securities through this platform.

Syed Rashed Hussain

The scope of developing the bond market is much higher than any other market available in the country now.

Bangladesh, as one of the worst climate-vulnerable countries, could benefit significantly from sustainable bonds, a crucial component of sustainable financing having a global market size of $6.60 trillion. The country needs to formulate policies and regulations that will attract global impact investors.

Bondholders other than banks, financial institutions, and insurers enjoy a tax exemption against holdings of zero-coupon bonds.

"Investors will be attracted to all types of corporate bonds if such tax benefit is extended to all debt securities issued by private entities."

Syed M Omar Tayub

The country's total bond market -to- GDP ratio is 11.63 per cent, with treasury bonds accounting for 11.45 per cent. "That means we're talking about a market that, in fact, does not exist here."

The country's bond market still is at its nascent stage mainly because of a structural gap in the national policy for long-term financing.

Long-term funding through bank loans against short-term deposits poses challenges to banks' debt management. The economy has been bearing the fallout.

The ministry of finance needs to play a big role in formulating a proper strategy starting with the central bank's Monetary Policy Statement (MPS).

In the area of private-sector credit-growth projection in the MPS, there must be a portion of credits coming from the bond.

Kazi Farhan Zahir

Many ones say the IFC's investments made in bonds are very negligible despite having a wide range of investments in different areas in Bangladesh. "Corporate governance is a must to attract investments from foreign investors and development partners in any kind of instruments, including bonds."

In some cases, the IFC conducted a series of transactions with the client because of credibility and transparency.

A development partner will not be interested in bonds unless the issuer company has at least an ETP (Effluent Treatment Plant) at its factory.

"Nothing will remain motionless if the governance is ensured by the issuer companies."

Bidyut Kumar Saha

"We have rules and regulations and the regulatory framework. But there is a lack of enforcement and corporate governance."

As much as eight debentures previously failed and investors' dues allegedly were not settled.

The business of an issuer can fail or even collapse. But investors in those debentures are not aware whether the issuers were brought to book. The problems of the equity market and bond are related to each other. "Apart from institutional capacity and credibility of the issuer companies, the role of trustees and credit -rating agencies must be ensured."

Rewards and punishments have to be ensured to restore investors' confidence for the sake of the bond market and equity market.

Dr. Prashanta Kumar Banerjee

The situation of the country's bond market is, "It was and was supposed to have flourished and now it does not exist."

A bond market will not flourish unless its pre-conditions are fulfilled. A debt market will not perform unless the equity market performs.

Also, the performance of the government bond market is needed for establishment of the corporate bond market.

The path of default loans is being paved through banks as they are giving long-tenure loans against short-term deposits.

Wherever there are default loans, the provision of single-party-exposure limit set for bank loans was breached.

Good companies should be convinced not to go to the banks for long-term financing. The capital market should be the sole source of project financing. Different organisations, including the city corporations, should also be asked to enhance their credit rating to raise funds issuing bonds to reduce dependency on the government.

 Shamsul Huq Zahid

In Bangladesh, the government remains a dominant player in the bond market where private bonds, debentures and sukuk or Islamic bonds have a nominal presence.

Transactions in tradable government securities have been on the decline in recent years.

The issuance of corporate bonds has recorded a rise in recent years. But general investors do not have access to such bonds as they are usually disposed of under private-placement facilities.

Bonds that usually offer reasonable yield are considered safe investments by knowledgeable savers. A vibrant secondary market for transaction in both government and private bonds is urgently needed to meet the long-term investment needs of both government and private sector.

"We all are aware of the fact how the crisis was created over the years. Unless and until investors' confidence is regained through reforms and other corrective measures, it may not be possible to get a vibrant bond market in place.