What it is
A debenture is an IOU. The bank borrows from investors for a fixed term, pays interest every six months or year, and repays the principal at the end.
Nepali banks issue debentures on NEPSE. You may have seen them listed next to shares, with names like '10% NABIL Debenture 2085'.
Banks like debentures because they are long-term money, and because NRB allows part of qualifying debentures to count as Tier 2 capital.
How it is calculated
Face value of debentures outstanding, adjusted for issue costs under NFRS. Shown as a liability.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL had Rs 1,273.58 crore of debentures outstanding at the end of FY 2082/83 Q4.
What good looks like
A moderate amount gives the bank stable long-term funding and a capital boost. Debentures must be repaid in full at maturity, so a large stack maturing in one year needs planning.
Watch out
- Debenture holders rank ahead of shareholders if the bank fails, but they are not depositors.
- Interest on debentures is a fixed cost whether or not the bank makes profit.
- Only part of debentures count as capital, and that part shrinks as maturity nears.
In Nepal
NRB's Capital Adequacy Framework 2015 lets subordinated debentures count toward Tier 2 (supplementary) capital within limits and with amortisation in the final years. SEBON approves each public debenture issue.
Questions
No. A share is ownership; a debenture is a loan to the bank. Debentures pay fixed interest and are repaid; shares pay dividends and are not.
For long-term money and because qualifying debentures add to regulatory capital, which lets the bank lend more.