NBFIs should rely more on bonds than deposit

The country's non-banking financial institutions (NBFIs) should move away from their deposit reliance to the bond option for the sake of healthy development in the financial sector, an international financial consultant said.

 "To my mind, the bond market can be presented as an alternative to the deposit reliance of NBFIs. That could be very healthy development for the financial sector," Vinod Kothari, chief executive officer (CEO) of Vinod Kothari Consultants Pvt Ltd in India, told the FE in an interview recently.

Mr Kothari was in Dhaka to conduct a two-day workshop on "Bond Markets in South Asia: Theory vs Market Practice, Regulatory Atmosphere, and Development Potentials" arranged by IDLC Finance Ltd at a city hotel.

 "They (NBFIs), very strong player in the financial market, should consciously move away from deposit to bond option," he said.

In this connection, the policymakers should discuss with the senior-level officials of NBFIs and convince them of gradually moving away from deposit to bonds, he said and spoke in favour of continuation of deposit at the banks.

On the importance of a bond market, he said, "One of the most important factors is that the bond market provides stability to the financial sector."

Equity market is very important, but it is volatile and sensitive; debt market is far more stable because institutional investors invest there and they look for aggressive growth; so, debt is not prone to cyclical bubble that the equity market experiences. That's why simultaneous existence of strong bonds, debt and equity market is a kind of deterrent to the formation of a bubble; that is very important, he continued.

 "The second important factor for any economy is the stability of interest rate. And existence of the bond market helps create the stability of interest rate," he said.

 "Development of a bond market is typically need-based; it comes automatically when there is an opportunity," said Mr Kothari, a trainer and consultant on different specialised financial instruments and subjects.

 "Virtually, there is no secondary market; all that we have is basically primary market," he said, adding, "Secondary market is not a precondition for a primary market; it (secondary market) automatically develops when there is a strong primary market."

Citing examples of other countries in South Asia, Mr Kothari suggested the bond issuers to take 'partial credit guarantee' from multilateral agencies to issue bonds.

It's because, as he said, "Partial guarantee by the multilateral agencies like ADB and IFC will substantially increase the acceptability of a bond."

When the issuers come up to issue bonds, the investors will not always be comfortable and happy with the quality of the bonds. In that situation, this guarantee will increase their acceptability. "They (agencies) are willing to give guarantee. They will not provide funds, rather give guarantee partially," he added.

Emphasising the creation of awareness about the advantages and benefits of bonds, Mr Kothari said, "This type of get-together (like the IDLC's workshop) will create momentum and positive environment for the bond market."

He also suggested ensuring certainty in the regulatory measurers and developing a CDS (credit default swap) market for building a strong bond market in the country.

Mentioning the financial sector development as the first priority for overall development of any country, he said, "The financial sector development must be well-thought-out and well-planned, not simply impulsive."

There was a lot of development in the last 15 years, but that was impulsive development like the NBFI, the mutual fund and asset management etc, he said, mentioning the lack of properly regulated development in the country's financial sector because of not having thoughtful long-run measures.

Mr Kothari laid stress on having a central policy on what kind of institutions and infrastructure to have, and what are the policy measures-- including taxation - that are needed.