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Sunday, 7 August 2011

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‘Central Bank should regulate debt market’

The corporate debt market should be regulated by the Central Bank, rated and given to primary dealers, which will help develop it, said CEO RAM Ratings Lanka Adrian Perera. The debt market is 3-4 times bigger than the Colombo Stock Exchange (CSE), but the Central Bank is not aware of who is raising the funds. All debt instruments, therefore, should be rated so that the Central Bank is aware of who is raising money.

Although the equity market is relatively developed, the debt market in Sri Lanka is still in its nascent stage. There is scope to develop this market. The Securities and Exchange Commission (SEC) promotes the equities market through the CSE, (Colombo Stock Exchange) but not the debt market. As of now there are no champions to promote the debt market though we have regulations on par with the USA.

Perera said that if corporate debt is handled by the primary dealers it will open more avenues to increase their income. They can use a percentage of their portfolio as corporate debt paper.

The regulator should relax regulations on pension funds, insurance companies, EPF and ETF funds so that those monies can be invested as they are big funds and long-term investments.

In addition, ratings should be promoted by the SEC and the CSE as it brings transparency which in turn will help attract quality investors. He said that when the bond market develops 10 times the banks will develop 30 times.

Earlier in India, the debt market was only 0.3 percent, but now it has increased to 20 percent. The corporate debt market is vital for long-term sustainability of the capital market.

When the debt market develops the profitability and funds of the banks will increase. In addition the banks should not fear the rating agencies. The corporate debt market is not a threat but a benefit to the banks.

He said that developing the debt market will help the country become a financial hub in two years. Perera was confident that it was an achievable target but the fundamentals have to be in place.

Perera said that the IMF and the Central Bank are keen to develop the debt market. A consultative committee must be setup to get the opinions of industry, players before implementing any regulations which can be harmful to its development.

At present there is a private debt securities market that cannot be tracked. A simple system to register these institutions and make rating mandatory. The Central Bank too should get involved as the papers go through the banking sector.

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