All words and no action

Staff Correspondent
Thursday, November 2nd, 2017


 

Bangladesh’s secondary bond market lacks effectiveness

 

An effective bond market plays an important role in the economic development of a nation, as it provides an alternative method of giving money to entrepreneurs. It has the ability to generate employments and industries, but sadly, that is not the case in Bangladesh as of yet. There are no corporate bonds in the market, due for which the bulk of the responsibility is rested upon banks. But as the banks are busy in dishing out loans to the government, they have lost their ability to invest in such an endeavour.

 

Indeed, a vibrant domestic bond market can reduce a country’s dependence on short-term foreign currency borrowing and also help the country accelerate its economic activities. One of the problems in Asian countries is that they are too dependent on short-term foreign currency borrowing which is dangerous. Development of a domestic bond market should be a priority of the country. A proper domestic bond market can speed up financial development of a country like Bangladesh.

 

Only limited among banks

 

From the amount of deposits that banks usually collect, 19% of it has to be put in the central bank, out of which, 5% is Cash Reserve Requirement (CRR) and 13% of which is Statutory Liquidity Ratio (SLR.) The bank can always dish out the remaining 81% as loans. Currently the provision of keeping CRR and SLR against deposits is Tk. 1.4 trillion, but they actually have Tk. 2 trillion worth of idle money, in the form of government bonds and bills. According to the central bank, total bonds are accumulated to Tk. 1.45 trillion, which are mostly five to twenty years long.

 

Share-dependent stock market

 

Globally, the share market has two basic ingredients, one being shares and the other being treasury bills/bonds. If the share prices go down, then the bills/bond prices go up, and vice versa. As the latter is relied upon for fixed revenues, the fluctuation of share prices is used to extract profits. If the price of shares goes down, then investors tend to balance it from bond investments. In Bangladesh, there are shares in the stock market, but no securities. So if the share prices go down, investors do not have anything to balance it out with, hence the crashes and depressions. If a stock market had existed, none of it would happen.

 

Banks’ woes

 

Chief executives in some of the banks who give loans to the government say that they are currently in a tight spot. They are taking loans which are 5-20 years long, but they are being given bonds as collateral. Their loan money is stuck with the government for a lengthy period of time, the actual figure standing at Tk. 1.45 trillion. In order to carry out the bond transactions, the government had initiated a secondary bond market. But thanks to its inactivity, that is also stalled as well. The banks were only supposed to keep Tk. 50 thousand crore as bonds, but as they have Tk. 1.45 trillion, it is idle money as of now, that is almost void of any sort of transactions. Banks are saying that they are receiving interest rate of bonds at 9.75%, but actually receiving it at 6-7% (although they pay 12% on bank deposits). If the bond market was active, then they could have balance out their expenses through the bond interests.

 

Initiatives to activate the bond market

 

The central bank has directed insurance companies to invest 30% from their funds in the bond market. Additionally they have also asked the financial institutions to invest a portion of their mutual funds in the market, relaxing some of their policies for doing so. Despite the efforts, not more than Tk. 3 billion is being invested on a monthly basis. Sources say that if all the concerned parties invest more than 30% of their mutual funds/other funds, then the bond market would be proactive, erasing the banks’ instabilities. Sources at Bangladesh Bank say that they have been trying to keep the secondary bond market active since 2005, but it has yet to establish credibility on its own. They have had to revise policies on multiple occasions to make it active.

 

Bank money becoming stale?

 

The government is trying to reduce their deficits by taking long term loans from the banks (80% of what they have taken so far.) But low deposits, high management expenses and inflation have disabled banks from feeling good about it. They risk facing a huge liquidity crisis. This may also lead to anarchy in banks and financial instabilities. According to bankers, the current inflation rate stands at 5.6%, bank management expenses at 1.5% and interest on deposit rates at 7%. So their average income on government loans is Tk. 11, but average expense stands at 4%. Many governments in the world set their inflation rates after looking at their bond interest rates, sadly which is not the case in Bangladesh.

 

In order to meet their budget deficits, the government takes loans in two forms – firstly, the year-long treasury bills, which are based on days – 91, 182 and 364 respectively. And second through loans, 5-20 years long. They usually used to take loans with the first method, but after 2009 they switched to long term loans, as short-term loans and their subsequent repayments hampered consistent fiscal policies. As mentioned earlier, the Tk. 1.45 trillion idle bills and bonds are inactive, rendering them useless. Dr. Salehuddin Ahmed, former central bank governor, said that it is natural that the banks’ efficiency will go down as a result of long-term government loans. But rising bank expenses and inactive bond markets will deepen the crisis in future. He warns that it order to avoid this, the government must take lesser amounts of loans from banks and invest more on savings certificates.

 

Multiple solutions if bond market active

 

Traditionally, during cash crises, banks salvage some of it through loans from call-money market, but at high interest rates. If the government can keep their bonds and bills and allow their inter-bank transactions, the crises can also be solved. This was the initial vision in 2003 to open the secondary bond market. But 14 years have passed since then, with no fruitful results.

 

The lowest amount of investment of treasury bills and bonds is set at Tk. 1 lakh, which is why general investors cannot invest like other companies, according to sources at Primary Dealer Bangladesh Ltd (PDBL.) They opine that involvement of general investors is a requisite for making this bond market active, so the lowest amount for investment should have been Tk. 10,000. Similarly additional branches are being opened for treasury bills/bond transactions only, with determined interest rates. But with the risk of companies going bankrupt, there should be transactional securities from the government as well. This way it would entice investors in the secondary bond market, while keeping it risk-free at the same time.

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