Corporate bond issuance helps ease reliance on credit

The thriving corporate bond market is regarded as an efficient gateway to reducing the excessive reliance of firms, and the economy at large, on bank credit.

According to the Asian Development Bank (ABD), the Vietnamese corporate bond market has reported a number of positive developments with impressive annual growth rates of 29.5 per cent in 2017 and 30.1 per cent in 2018.

The first half of 2019 saw issuers, including commercial banks and securities firms, raise a combined VND60 trillion (US$2.58 billion) from bond issuance.

The issuance of corporate bonds, which is thought to help navigate risks and profits for investors, acts as an efficient method of capital mobilization for enterprises. Interest rates set on the capital raised from long-term bond issuances are lower than that of the respective loans provided by commercial banks. Elsewhere, the State Bank of Vietnam has been embracing tight credit limits for banks.

This could be seen as a positive step for the domestic capital market while proving that businesses are eager to seek additional capital sources amid current restrictions on medium- and long-term commercial loans.

Bui Quang Tin, a financial analyst, said corporate bond issuance brings about a string of benefits for issuers and investors as more than 70 per cent of the economy’s total capital traditionally come from banks, whilst the majority of bank credit is short-term loans.

If enterprises rely heavily on short-term loans from commercial banks in order to meet their demand for medium and long term capital, they could run into financial risks and fail to achieve sustainable growth.

The issuance of corporate bonds buoyed by simplified procedures incentivizes investors into making transactions, Tin noted.

Can Van Luc, a banking-finance expert from the Joint Stock Commercial Bank for Investment and Development of Vietnam, claimed that the recent thriving developments of the corporate bond market has allowed persifying products from the domestic financial market.

Luc added that newly-issued regulations will enable enterprises to issue bonds during different phases in order to increase capital and keep pace with their projected progress. They are entitled to release bonds even if they record no profits during the year prior to their issuance. This regulation is expected to ease deadlocks for those involved in issuing bonds.

Existing market potential and policy incentives could give the green light to the future development of the corporate bond market.

Deputy Prime Minister Vuong Dinh Hue said at a recent meeting of the Government’s Steering Committee for Enterprise Renewal and Development that businesses had reportedly issued bonds at the eye-watering interest rates ranging from 12 - 14 per cent. Deputy PM Hue stressed this could pose a threat to the inflation control and interest rates which the Government has planned for the year.

The Ministry of Finance in turn has required the State Securities Commission of Vietnam to announce the list of separate corporate bond issuances and relevant information at stock exchanges.

Deputy PM Hue also underlined the need to intensify the development of the corporate bond market in order to lessen the economy’s reliance on capital from commercial banks. Developing the corporate bond market becomes an indispensable method to achieve the goal.

It could do good if firms are able to raise capital as opposed to borrowing it from banks as this would help to increase capital for the economy, Deputy PM Hue said, noting that adjustments must be made if any problems or lack of transparency occur during bond issuance.