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The Financial Express

Securitisation : An alternative structured finance instrument

Md. Asiful Huq | Published: June 19, 2020 21:24:00 | Updated: June 30, 2020 21:46:53


Securitisation : An alternative structured finance instrument

Securitisation -- an alternative and inevitable modern structured finance instrument - can meet ongoing increasing financing needs of large state-run development projects and of both public sector and private sector companies' development and expansion plans to lessen excessive burden  on banking sector as  well as boost the country's capital market.

Constraint of resources is a big impediment or challenge in managing public sector finance as well as private sector finance in Bangladesh in the way of meeting pre-planned development or capital expenditure. Every year   government faces huge challenge in resources mobilisation in meeting its development expenditure; and to meet the deficit finance it often opts  to borrow from banking sector directly through issuing treasury bill or treasury bond, and from non-banking sector -- mainly through National Savings Scheme and from foreign borrowing.  With huge budget deficit of Tk. 1900.00 billion as per proposed budget for FY2020-21 (near about 6.0 per cent  of GDP in proposed budget for FY2020-21 while overall budget deficit 5.50 per cent  of GDP as per revised budget FY2019-20 ) the government  has to spend a substantial amount as interest expense for  borrowing from banking and non-banking sources.

Too much borrowing from banking sector (Tk. 849.80 billion proposed for  FY2020-21 against Tk 824.21 billion as per revised budget in FY2019-20) may put the country's financial sector under pressure  as  credit flow to private sector may be hampered to a great  extent which in turn may further slow down the country's COVID-stricken economic progress. 

Finding no other easy possible way and with an objective to boost the revenue earnings through immoral fiscal policy support the government almost is often in dilemma every year whether to give opportunity to whiten black money to invest in certain particular sectors at certain percentage of tax  payment.  Any such move to give investment amnesty for black money demoralises honest taxpayers and creates economic disparity in the society.

As revenue earnings is not enough to meet recurrent operating and development expenditure, country's tax administration - other than borrowing from banking sector -- is providing such facility for the last few years though it has been proved ineffective .

Every year the government has to struggle to mobilise fund to finance large infrastructure projects like Padma Multipurpose Bridge, Padma Rail Link, Dhaka Metro Rail Dhaka, 2400 MW Rooppur Nuclear Power Plant,1320 MW Rampal Power project, 1200 MW coal-fired Matarbari power plant, Chattogram-Cox's Bazar Rail Link, Paira Deep Sea Port, kranaphuli Tunnel etc.

On the other hand to carry out the huge ongoing expansion plan  in private sector, often large corporate conglomerates are on stress to mobilise required  fund  against the backdrop of  limited opportunity to raise equity fund from country's capital market through  being enlisted. Corporates in private sector are usually reluctant to be listed with the stock exchange to raise capital  for funding requirement due mainly not to share the ownership of the company with others and to avoid regulatory binding in the areas of  financial disclosure (both quarterly & annually), non-financial disclosure as price sensitive information, Board formation and corporate governance issue. Hence despite the existence of  difference of corporate tax rate among  listed and non-listed corporates  (7.5 per cent gap  in proposed  budget of FY2020-21, earlier 10.0 per cent gap in FY2019-20) of many prospective sectors with sound financial track record don't show interest to  be listed with the bourses.

Moreover, to borrow loan ( both funded and non-funded)  from  banking sector as well as from non-banking sector is also clutched with regulatory restriction of highest limit of single borrower exposure . Again banks' large loan exposure is capped with NPL status of the respective lending bank as per prudential regulations of the central bank.

Hence corporates cannot easily borrow from one bank or financial institution due to threshold of highest loan limit restricting both funded and non-funded exposure.

Securitisation, either asset backed securitisation (ABS) or mortgage backed securitisation (MBS) can play an instrumental role to  rescue the corporate sector  as well as public sector from the scarcity of capital fund.

Right now in Bangladesh market, there is a very few corporate plain vanilla bond  and zero coupon bond mainly for  financing long term  capital expenditure for expansion purpose in private sector, while in banking sector  many banks have been compelled to issue Tier-II bond to meet regulatory capital requirement in line with Basel-III. But as these bonds are unsecured and subordinated to depositors' liability and get capital treatment up to a certain time frame, banks with capital shortfall often are obligated to issue second and third Tier-II bond to be compliant in line with Basel capital requirement. Presently, there is a practice among few banks to issue perpetual bond to enhance additional Tier-I  capital to meet regulatory capital requirement.

In the government sector major treasury bonds are issued to meet  as a tool for  budget deficit financing and these treasury bonds (mainly with the tenure  of 2, 5, 10, 15 and 20 years maturity)  are held by scheduled banks as SLR requirement with some exception for investment pupose. Though these treasury bonds are listed with Dhaka Stock Exchange, their trading in the secondary market is totally absent.  

In public sector, government can securitise  future earnings, receivables and cash flows and can easily issue debt securities based on such earnings to finance large infrastructure projects where huge financing requirements are there and long term return or benefits will be generated over a long period of time.  Rather than depending upon bank or foreign borrowing, asset backed securitisation (ABS) can obviously be a long term financial tool  for deficit financing of mammoth development projects.

A strong and vibrant Bond market is a must for issuance of such ABS; The government  can also issue asset backed debt securities outside Bangladesh to raise fund to finance its ongoing development projects where future receivables or returns  are there.  Initially, to start with successful securitisation transaction, the government has to formulate detailed guidelines for asset and mortgage backed securitisation, to make the debt securities lucrative to prospective investors (bondholders);  tax exemption may be declared on earnings of such investment along with easy  repatriation of interest and principal in case of holding the bonds by foreign investors.  Quick enlistment with stock exchange has to be ensured for easy transferability of debt instrument through buy-sale and for that a separate platform for bond market can be created within the stock exchange.

On the other side, in the private sector, many large corporate, banks and non-bank financial institutions, house loan financing company can explore the opportunity of issuing mortgage backed securitisation (MBS) to avert   finance constraints  in order to expand their ongoing businesses. Other than key players of such securitisation transaction (e.g., Originator, SPV (special purpose vehicle), Trustee, Credit Rating Agency , Issue management company, Investors), the role of the central bank, BSEC, and country's tax regulator-- NBR  is pivotal  in this regard.

We have one guideline -- Asset backed Securities Rules 2004 that has been formulated by Bangladesh Securities and Exchange Commission (BSEC) and another tentative guideline was prepared by Bangladesh Bank on Mortgage Backed Securitisation in 2007.

All the above regulations need to be updated clarifying the detailed and more specific duties and responsibilities of each stakeholders related to securitisation transaction. Recently, BSEC has taken an initiative and prepared draft rules namely Bangladesh Securities and Exchange Commission (Debt Securities) Rules, 2020.

The first securitisation transaction in Bangladesh took place in 2004 when Industrial Promotion and Development Company (IPDC) issued asset backed securitised zero coupon bond against debt receivables.   After that no securitisation transaction took place in Bangladesh. Many prospective investors (both individual & institutional) of such types of financial instrument are there in both local market and abroad.  Hence, it is high time to explore the opportunity to lessen the burden on the country's banking sector to borrow for deficit financing in budget as well as to help boost country's capital market through ensuring the presence of strong bond market paving the way for further expansion programme in private sector along with public sector.

 

Md. Asiful Huq is the Chief Rating Officer of CRISL. asif.cro94@gmail.com

[Opinion expressed in this article is author's own and does not necessarily reflect the position of the entity where he works]

 

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