Long-term retail bond set to come back after a decade

Long-term retail bond set to come back after a decade

Mumbai: After a decade, Indian consumers are set to have an option to buy long-term bonds maturing in 10-15 years. The country’s largest lender State Bank of India (SBI) is preparing to offer this investment instrument to retail customers. The plan is to raise around Rs5,000 crore, in tranches.

According to a person familiar with the development, the bank’s board discussed this at its last meeting at Neemrana, Rajasthan, in December and the issue can hit the market before the current fiscal year ends in March, provided the regulatory clearance is in place.

Currently, SBI mobilizes 8-10-year deposits offering 7.5%. But it would need the Reserve Bank of India’s approval for the longer term bond.

“We want to introduce a new kind of instrument in the market, offering consumers yet another choice," said a senior State Bank official who did not want to be identified.

According to the official, it could be a fixed rate instrument or a bond linked to a benchmark security and the finer details are being worked out.

The prevailing AAA-rated bonds are offering around 8.70% and money market analysts said if the bank decides to go for a fixed rate instrument, it is expected to offer a similar coupon. State Bank enjoys AAA rating.

The bond will have call and put options offering both the investors as well as the issuer (the bank, in this case) options to exit before the instrument matures. Typically, in a falling interest rate scenario, the issuer calls back such bonds to cut costs and if the interest rate rises, investors redeem the bond and park the money elsewhere to earn more.

“Retail investors don’t have too many avenues for long-term investments and a long bond will be a good opportunity. It all depends on how the bond is marketed. Given State Bank’s branch network, it should do well," said S. Raghavan, head of treasury at IDBI Gilts Ltd, a primary dealer that buys and sells government bonds.

State Bank has about 12,000 branches, the largest branch network of any Indian bank.

Although this is the first time in a decade that a bank plans to sell bonds to retail customers, corporations such as Tata Capital Ltd and L&T Finance Ltd sold such bonds in 2009,

Tata Capital raised Rs2,500 crore through a five-year bond and L&T Finance raised Rs1,000 crore through five-, seven- and 10-year bonds.

SBI had earlier tapped the retail market by issuing a floating rate bond of 10-year maturity to raise Rs1,500 crore in 1994. However, the bonds were redeemed in 1998 when the bank exercised the call option after five years. For floating rate bonds, the rate of interest is linked to a benchmark rate such as government paper’s yield and reset periodically.

Sometimes, long-term bonds are deep discount bonds or an instrument issued at a steep discount to its face value. However, the State Bank’s bond will not be a deep discount bond, the executive said.

In mid- and late-1990s when interest rates were ruling high, erstwhile financial institutions Industrial Development Bank of India (IDBI) and ICICI Ltd issued such bonds at regular intervals. Barring one such bond issued by ICICI, all were redeemed before they matured as the institutions wanted to cut costs when interest rates started falling. IDBI issued the last deep discount bond in September 1999 and redeemed it in 2004 after five years.

A deep discount bond does not have a coupon attached to it. At the end of the maturity, investors get paid the face value of the bond.

While the proposed long bonds will offer the traditionally risk-averse retail investors a new avenue to invest, it will shore up the capital of State Bank. The bonds will be part of its tier II capital which consists of various reserves and long-term bonds. The tier I or core capital of a bank is its equity.

Under regulatory norms, a bank needs 9% capital adequacy ratio or Rs9 worth of capital for every Rs100 worth of assets. A higher capital base allows a bank to create more assets, and even though year-on-year credit growth in the industry has been a mere 11.3%, banks are expecting higher loan growth as the Indian economy is on a firm growth path.

Many Indian banks have been raising money through bonds to shore up their tier II capital but none of them as yet offered retail bonds.

According to a person in the Indian central bank who didn’t want to be identified, it is taking a close look at the State Bank’s proposal to make sure that the bonds are sold in such a way that consumers are aware of the difference between long-term deposits and bonds.