Mumbai: A possible drop in the interest rate when the Reserve Bank of India (RBI) declares its credit policy on 29 January and the need to meet the capital adequacy norms set by a new international guideline that becomes effective April may see more banks tapping the bond market.
Already, a few banks have raised Rs3,000 crore in the first week of January and bond dealers say more banks could raise another Rs5,000 crore by the end of the month.
If RBI does effect a cut in the interest rate, the cost of money will fall and it will encourge banks to raise funds from the debt market. They need the capital to meet Basel II international norms, under which capital requirements of banks will increase as they need to factor in market risks. Indian banks with international exposure are required to conform to Basel II by April but those banks which do not have any overseas presence have time till April 2009. Banks are floating 10-year bonds to shore up their capital base. These bonds form part of their tier II capital while equity and reserves form the tier I or core capital.
Public sector banks have taken the lead in floating bonds. Punjab National Bank, Bank of Baroda, Andhra Bank, Canara Bank and Bank of Maharashtra have raised money from the market as has private sector ICICI Bank Ltd.
“The interest cost for such bonds have gone down by half a percentage point. This translates into a saving of Rs1 crore worth of interest cost every year for every Rs200 crore banks are raising,” said Anil Ladha, head, debt capital markets at ICICI Securities Ltd.
The sovereign 10-year bond yield witnessed nearly half a percentage point drop in past one month and was trading at 7.57% on Wednesday. “Now that the 10-year bond yield is declining than what it was in the recent past, the coupon rates are becoming favourable for us and we are getting capital at a competitive rate,” says Bank of Maharashtra chairman M.D. Mallya, whose bank raised Rs200 crore.
Arun Kaul, general manager of treasury finance at Punjab National Bank, said public sector banks are benefitting from favourable conditions as, unlike private lenders, they cannot access the equity markets easily as the government stake in them cannot fall below 51%.
According to Nirupam Mehta, general manager and chief financial officer of Union Bank of India, banks watch the market closely and raise money “when it is cheapest”. Union Bank has raised Rs400 crore in November and is currently “watching the market”.