Depositors - beware of high interest paying institutions

Depositors need to be weary of institutions which pay high interest rates, because of their unsound financial stability, according to a bond market expert.

"If there is a credit culture in the country, such things will not happen. People need to be weary of firms which pay high interest rates," Priya Thamotheram, CEO RAM Ratings said, addressing a media workshop on bond markets recently. She said that many have lost their life savings as a result of placing their trust in weak institutions or instruments.

"It is crucial for investors to take adequate precautions to avoid such undesirable circumstances. One such measure is for investors to be aware of the credit ratings of the institutions or issue where they have invested their hard-earned money," she explained. She noted that it is highly 'dangerous' to only depend on the banking sector for borrowing money. "Sri Lanka needs an active bond market and they need to be aware of other ways to borrow money,” she said emphasising on the bond market.

Thamotheram added that a bond market brings stability to the country. "The bond market is considered as safer and less riskier than the stock market," she said. She added that the bond market in Sri Lanka lacks liquidity, the processes for issuance are complex, there are high transaction and issuance costs and the awareness among investors about the bond market is low. She explained that credit rating agencies provide investors with independent opinions on the risk associated with institutions or instruments, be they banks, finance companies or debentures. "The particular rating indicates the ability and willingness of a particular institution to repay investors, together with the promised interest, on a timely basis," she said.

Investors can use this rating to determine the level of risk associated with such investments, and can therefore decide the degree of risk they are willing to accept in earning the required returns. “Credit ratings are relative ranking that represent the creditworthiness of an institution or issuer in relation to another. Therefore, ratings should be used as a guide to determine the returns expected from a particular investment, and to assist in pricing investment vis-à-vis the attached risks,” Thamotheram said.