Debentures in Nepal: the 10–12% bonds most retail investors ignore

Every IPO season, lakhs of Nepalis pile into the demat queue for a Rs 100 share that might pop on listing. The same investors scroll straight past the debenture issues sitting in the same Mero Share menu, paying a fixed 8 or 9% a year for a decade, with a credit rating attached and far less drama. A friend who applies for every IPO going admitted he had never once applied for a debenture. He wasn't sure what they were, and assumed they were "for the banks, not for us."

They are very much for retail investors. A debenture is just a loan you make to a company in exchange for a fixed coupon, and in Nepal that company is usually a commercial bank with a published credit rating. The yields aren't lottery-ticket exciting, which is exactly why they get ignored, and exactly why they're worth understanding for the boring part of a portfolio.

What a debenture actually is

Strip away the jargon and a debenture is a contract: you hand a company Rs 1,000 per unit, it promises to pay you a fixed percentage every year and return your Rs 1,000 at the end of the term. It is debt, not equity. You are a lender, not an owner, so you get no voting rights and no upside if the company soars, but you sit ahead of shareholders in the queue for interest.

In Nepal, the issuers are overwhelmingly commercial banks, and the reason is regulatory. Banks must hold enough capital, and a debenture counts toward their Tier-2 (supplementary) capital. It also helps fix a structural problem: banks fund themselves with short deposits but lend long for homes and projects, and a 7-to-10-year debenture is long-term money that eases that mismatch. The issue is governed by the Companies Act 2063 and the Securities Act 2063, must clear SEBON, and ends up listed on NEPSE. Tenure is typically 7 to 10 years, and the face value is a flat Rs 1,000 per unit.

This makes a debenture a close cousin of the government and citizen savings bonds NRB sells, with one important difference: a government bond carries sovereign risk (effectively risk-free in rupee terms), while a bank debenture carries that specific bank's credit risk. You're paid a little more for taking it.

The coupons: 7–9% new, 10–12% on the older ones

The headline of this post needs an honest footnote. The 10–12% debentures are real, but most of them were issued around 2076–2080 when the whole rate environment was high. As rates fell, so did new coupons.

A snapshot of what's been issued and what trades:

Two things to read from this. New primary issues now cluster at 7–9%, a point or two above a current fixed deposit. The high-coupon 10–12% debentures still exist and still trade on NEPSE, so a retail investor can buy them today through a broker. But you'd pay above the Rs 1,000 face value to get that fat coupon, which pulls the actual yield to maturity back down toward the prevailing rate. A 10.25% coupon bought at, say, Rs 1,150 is not a 10.25% return. So the realistic premium over an FD is modest, not dramatic, whichever route you take.

How to buy one: it's an IPO with a coupon

The mechanics will be familiar to anyone who has applied for shares, because they're identical.

When a company opens a debenture issue, you apply through C-ASBA at your bank or through the Mero Share app, using the same demat account you use for IPOs. The amount is blocked in your bank account until allotment, exactly like an IPO application. The face value is Rs 1,000 per unit, and the minimum application is set by each issue rather than fixed across the market (the Nepal SBI debenture, for example, set a 25-unit minimum, so Rs 25,000). Issues are usually split between a public tranche and an institutional one; the Nepal SBI issue reserved 40% for the public and 60% for institutions.

A concrete recent example pulls it together: Nepal SBI Bank's debenture paid a 7% fixed annual coupon over a 10-year tenure, raised Rs 3 arba at Rs 1,000 face value, and was applied for via C-ASBA or Mero Share. ICRA Nepal rated it LAA. That rating is not decoration; it's the number you check before you apply.

If you miss the primary issue, the secondary route is to buy a listed debenture on NEPSE through your broker, the same screen you use for shares, at whatever price it's trading.

Interest, tax, and the rating you must check

Three details decide whether a debenture is a good buy.

Interest frequency. Debenture coupons are typically paid half-yearly, though the prospectus defines it for each issue. A 9% debenture, say, would pay roughly 4.5% of face value twice a year. That regular cash flow is part of the appeal for someone wanting income rather than growth.

Tax. Interest on a debenture or bond paid to an individual is taxed at source at 6% under Section 88 of the Income Tax Act, against the general 15% withholding that applies to institutions. That's the same 6% final tax that applies to bank FD interest, so debenture and FD interest are taxed identically; the comparison comes down to the gross coupon versus the FD rate, not the tax. The prospectus spells out the deduction for each issue.

The credit rating. This is the one most retail buyers skip and shouldn't. Every public debenture must be rated by a SEBON-licensed agency: ICRA Nepal (the first, established in 2012), CARE Ratings Nepal (the second, licensed in 2017), or Infomerics Credit Rating Nepal. ICRA's long-term scale runs from LAAA (highest safety, lowest credit risk) down through LAA and LA, all the way to LD (default). A debenture rated LAAA or LAA from a large commercial bank is about as safe as corporate debt gets in Nepal. A lower rating means a higher coupon for a reason. The rating is your one-glance read on how likely you are to actually get your coupon and principal back.

The risks worth taking seriously

A debenture is safer than a share and riskier than a fixed deposit. Three things separate it from the FD.

It's usually unsecured. You're lending on the issuer's creditworthiness, not against collateral, which is why the rating matters and why a deposit guarantee does not apply. An FD at a licensed bank is covered by the Deposit and Credit Guarantee Fund up to Rs 5 lakh; a debenture is not.

It's locked long. Seven to ten years is a real commitment. Your money is tied up at a fixed rate, which is great if rates fall (you keep your high coupon) and painful if they rise (you're stranded below market while new issues pay more).

The secondary market is thin. In theory you can sell on NEPSE any day. In practice, debenture trading has historically been sparse, partly because brokers earn far smaller commissions on debt than on shares, so there isn't always a buyer at a fair price when you want out. It is improving fast: debenture trading volume jumped roughly 495% year-on-year early in FY 2024/25, from 240,000 units to 1.33 million, and over fifteen companies' debentures now trade daily. But "improving from very low" is not the same as liquid. Plan to hold to maturity, and treat the ability to sell early as a bonus, not a guarantee.

Where a debenture fits

A debenture isn't a replacement for your FD ladder or your equity, and it's certainly not an IPO punt. It's a third thing: a fixed-income holding that pays a bit more than a deposit for accepting a long lock-in and a specific bank's credit risk.

It makes the most sense for someone who already has the basics in place, an emergency fund and protection, and is building the fixed-income slice of a portfolio. If you expect rates to keep falling, locking a 9% debenture for ten years looks smart against an FD you'd have to keep renewing at lower rates. It suits income-seekers who like the half-yearly coupon, and anyone who wants to diversify fixed income beyond bank deposits without taking equity risk. Where it sits relative to mutual funds and CIT is the broader question in FD vs mutual fund vs CIT.

What it shouldn't be is the whole of your safe money. The lock-in and the thin exit mean a debenture is a slice, not the plate. Keep your liquid buffer in savings and a short FD ladder, and let a debenture take a measured share of the long-horizon, low-risk money where the extra point or two of fixed yield actually compounds.

What you actually need to know

1. A debenture is a fixed-rate loan to a company, mostly a bank. New issues pay 7–9% for 7–10 years, paid half-yearly, against 5–7% on a current FD. Older 10–12% debentures still trade on NEPSE, but you'd buy them above face value, so the real yield is lower than the coupon.
2. You buy it like an IPO and check it like a lender. Apply via C-ASBA or Mero Share at Rs 1,000 per unit, and read the credit rating (LAAA safest, down to default) before you do. Debenture interest is taxed at the same 6% as an FD, so the comparison comes down to the gross coupon.
3. It's a slice, not the plate. Unsecured, locked for years, and thinly traded. A debenture belongs in the long-horizon fixed-income corner of a portfolio that already has a liquid buffer and protection in place, not in place of them.

Comparing a specific debenture issue against renewing an FD? Email parjanya57@gmail.com with the coupon, tenure, and rating, and I'll run the after-tax, after-liquidity comparison with you.

This post is part of the Nepal Money Basics guide — the investing section.