Government Securities Market in Bangladesh: problems and Issues. By Emrul Haider chowdury

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1 Government Securities Market in Bangladesh: problems and Issues By Emrul Haider chowdury Examination Committee: Dr. Juthathip jongwanich (Chairperson) Dr. Sundar Venkatesh Dr. Yousre Bodir

2 Agenda Objectives of the study Methodology of the study Government securities market status in Bangladesh Constraints & possible solutions to develop secondary market in Bangladesh conclusions

3 Objectives Objectives of the Study: The principal objective of the study is to identify how to promote secondary market for Government securities in Bangladesh. To accomplish this principal objective, following specific objectives will be covered: to review the Government securities Market status of Bangladesh to identify the problems those obstruct the development of Secondary Market in Bangladesh to suggest some important policy measures to promote government Securities market in Bangladesh.

4 Methodology For the study both primary and secondary data collected from different sources. Collection of Primary Data: Assessment of existing literature as well as of discussions with some experts associated with the Government securities market like Primary dealers, banks etc. Collection of Secondary Data: The secondary data has been collected from different sources-bangladesh Bank, Ministry of Finance, Central depository Bangladesh Limited (CDBL), published research journals, published books, websites, etc.

5 Major development in the Government securities market in BD Event Year Adhoc T-Bills /10 yr BGTB 2003 Introducing PD system 2003 CDMC 2006 Discontinue Adhoc T-Bills 2006 Introduction of auction Calendar Rules of BGTB s 2007 Secondary trading Of BGTBs & 20 yebgtbs Multiple price based auction Marking to mark Oct 2008 Own Central depository December 2011

6 Debt scenario Nominal GDP(billion taka) Govt. Total debt outstanding 37.1% GDP Domestic debt outstanding 17.7% of GDP Borrowing from Banking 12.21% GDP

7 Outstanding of Securities Up to 30 th June 2011 total outstanding amount of Govt. securities is BDT billion. Tradable Government securities comprises % of total GDP 69% of total domestic debt 17.52% total bank deposits 21.84% of total bank loan & advances

8 (BDT in Million) % of instruments 10 YR BGTB 34% 15 YR BGTB 9% 20 YR BGTB 7% 91 Days T-Bills 4% 5 YR BGTB 30% 364 Days T-Bills 9% 182 Days T-Bills 7% -Long term 80.66% & short term 19.34%

9 Holder of Securities(Dec 2011) (in million) Source :Bangladesh Bank

10 Secondary Trading Fiscalyear Total Outstanding Total trading Trading(% of Outstanding) , , , , Source Bangladesh bank -In the volume of trading drop more than 50% -less attractiveness in terms of bank higher deposit rate

11 Secondary Trading as % of Outstanding % of Outstanding % % of Outstanding though the outstanding of securities increasing but trading is decreasing.

12 Secondary Trading, issue & outstanding in million Total Issued Total Outstanding Total Trading comparing with the outstanding & issue the secondary trading volume is opposite trend

13 Constraints & possible suggestions Narrow Investor base -Commercial bank is captive source(72%) -Insurance fund (2%) -provident fund (.10%) -Mutual fund (o%) -Foreign investment (0%)

14 Constraints & possible suggestions Narrow Investor base Investor base Bangladesh India Srilanka Banks Dominant (captive) 72% Dominant but not captive(44%) 26% of assets Of major banks Insurance Max 30% 75% of LIC assets 40 % of total assets Provident fund poor participation 40 % Dominant participation (97% assts of its portfolio) Mutual fund No participation Moderate 13% of total assts Foreign Investment No participation Participation only in dated Government securities Limited Access from 2006

15 Constraints & possible suggestions Absence of Price discovery -cutoff yield is not aligned with market -devolvement culture. -effect of SLR Demand of Securities bid cover ratio

16 Bid cover ratio bid-cover ratio of BGTBs' 4 Period 5 year 10year 15 year 20 year Jul Aug Sep Oct year 10year 15 year 20 year Nov Dec Jan Feb Mar Low BCR for securities reflects tight liquidity conditions.tableshowsthatbcrforbondsin recent months is just about 1, meaning bids received are just equal to amount auctioned

17 Constraints & possible solutions Rate of return(yield) -Others sector interest rate structure -Not aligned with market

18 Comparison of return in June 2011 Tenor Banks FDR rate(%) Govt.sec yield (primary) Banks FDR rate(%) Govt.sec yield(primary) month /91 days inter rest rate year /364 days year / 5 yr individual investor discourage -Banks cost of fund

19 Constraints & possible solutions Market infrastructure -No real time window -Manual DvP system -No central source of information on trading activity. -lack of expertise Reissuance -There are currently more than 190 BGTBs in existence with an average stock size of just over BDT 3 billion.

20 Devolvement culture Constraints & possible solutions -Auctions do not reflect the market -Authority is market maker rather than taker -No transparency in Primary yields, strongly discourage secondary trading. -Market oriented yield curve not exist

21 Constraints & possible solutions Devolvement on primary auctions Instrument PD BB Instrument PD BB Year 41% 16% 91-day 52% 3% 10-Year 28% 0% 182-day 28% 0% 15-Year 34% 0% 364-day 38% 0% 20-Year 26% 0% Sum 41% 1% Sum 33% 6% Source: BB

22 Constraints & possible solutions Burden of Primary dealers Required SLR (as on Oct,2011) Holdings Excess Holdings billion billion billion 76.59% of SLR -More holding -less earning, more cost of fund -Hamper profitability -less credibility to private sector

23 Constraints & possible solutions Funding risk PDs would take on a large degree of funding risk. Because interest rate of Government securities is not determined by market. Because of volatile interest rate primary dealers of government securities faces a interest rate risk. Since the price discovery process in the primary auction is not seen to be entirely market driven, PDs find it difficult to get a clear idea of the risk entailed by their primary market obligations.

24 Conclusion To make a vibrant and liquid secondary Government securities market in Bangladesh the authority should take steps: To Widen the investor base of Govt. securities. To make the yield aligned with the market Improve the infrastructure of market. Not to be price maker but price taker To reissue the securities

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