Growing economies need to sustain major trends such as infrastructure development, privatization, securitization, and the growth of new institutional investors requiring long-term assets to equal long-term liabilities. Bonds will perform an important role in meeting those needs, according to experts.
Sri Lanka should take a cue from most countries building local corporate debt markets in order to benefit from the diversification that such markets provide, such as diversifying financial sectors, allocating capital more effectively, and increasing financial sector competition.
“Right now (in Sri Lanka) all investments are either funded by commercial bank borrowings or private equity. The latter is the most expensive. This is why corporate bond markets should be developed so that one can raise monies from the corporate bonds,” Surinder D. Kathpalia, Managing Director Standard and Poor’s Singapore told the Business Times on the sidelines of the CMA Business Forum organised by the Institute of Certified Management of Sri Lanka together with RAM Ratings Lanka Private Ltd and its global partner Standard and Poor’s earlier this week.
Such measures partly reflect concerns about the future capability of banks to meet borrowers’ needs as banks conserve balance sheets to conform to Basel III capital adequacy requirements.
Mr. Kathpalia said that governments are also looking to local corporate bond markets to boost resilience to any future global shocks. They recognise the role well-functioning corporate debt markets perform in efficiently allocating capital and aiding the common goal of regional financial integration. “With bond markets comes a varied source of funding as well as an investor base,” he added.
He told the gathering that the interest in domestic bond market development also reflects the desire to reduce volatilities related to foreign capital flows. He said that deep and liquid debt markets are crucial as many Asian countries seek to build market maturity and sophistication, the ingredients that predictably have attracted so many issuers to the US and European markets. He added that this requires robust credit cultures which are built on key elements such as transparency, disclosure, high and reliable reporting standards, and good corporate governance.
In the ensuing panel discussion that followed after Mr. Kathpalia’s address, Chairman Chemanex PLC Preethi Jayawardena, also a member of the Central Bank Monetary Board’s Consultative Committee, noted that raising finances through a corporate bond issue is an economical option than borrowing from the banking system.
"There is also a mismatch because banks prefer lending on the short to medium term, but large development projects require long term loans. Corporate bonds do not have this problem as the tenure would match the project,” he added.
It was agreed that currently there is strong investor appetite for long term rupee securities and it is an excellent opportunity to develop the corporate bond market in Sri Lanka. President, Head of Corporate Finance and Strategy at John Keells, Krishan Balendra said that it would be a good thing for the government to issue a sovereign bond denominated in rupees.
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