Mumbai: Indian banks are queueing up to raise funds through the issue of domestic bonds as they anticipate a pickup in credit demand between January and March. A fall in corporate bond yields this year has also made such fund-raising viable.

So far this month, Canara Bank and Bank of India have already announced plans to raise capital through tier II bonds. State Bank of Hyderabad is said to have asked for bids from investors for a tier II bond issue, according to two bond arrangers. The country’s largest lender, State Bank of India (SBI), has already raised 4,000 crore through such bonds earlier this month and plans to raise 12,000 crore in tranches.

Tier II bonds are debt instruments issued by banks and have a minimum tenor of five years. Unlike tier I capital, which is counted as core capital for banks, funds raised through tier II instruments boost the secondary capital of a bank. The core capital of a bank consists of equity, while secondary capital is made up of debt instruments and reserves.

Since April, around 9,000 crore has been raised through tier II bonds, according to data from Bloomberg. Axis Bank Ltd, Yes Bank Ltd, Syndicate Bank, Vijaya Bank and Andhra Bank have raised funds through such bonds.

“I think the trend will continue into the next quarter as well and we may see more such issuances," said Ashish Jalan, assistant vice-president at SPA Securities, a broking firm.

“Given that provident funds get inflows from the special deposit schemes in January, banks prefer to approach these investors at that time," he added.

The lower cost of borrowing is also working to banks’ advantage. Borrowing through tier II bonds is cheaper now for banks as 10-year corporate bond yields are still about 20 basis points lower than a year ago, notwithstanding the recent uptick this month. Yields had plunged as much as 50 basis points between January and October. One basis point is 0.01 percentage point.

SBI priced its tier II bonds at 8.33%, which was 130 basis points cheaper than the 9.69% it paid on its last issue of such bonds in January 2014.

Demand for such bonds is also seen to be strong.

Ajay Manglunia, executive vice-president and head of fixed income at Edelweiss Securities, said that most banks approach the Employees’ Provident Fund Organization and Life Insurance Corporation of India (LIC) to seek investment in bonds.

“Given that the supply of long-term bonds is low, provident funds will prefer bank bonds and these bonds also offer a better yield compared with other public sector companies," Manglunia said.

Data from Prime Database, which tracks and collates information on fund-raising by companies and the government, shows that of the aggregate 2.79 trillion of corporate bonds issued during April-November, only 2.17% were bonds with a tenor of 10 years. The bulk of the issuances was in the two-to-five year category, with about 1.13 trillion being issued. In 2014-15, 10-year corporate bonds formed over 6% of total issuances.

Banks continue to raise tier I capital. A cumulative 1,200 crore has been raised through tier I bonds by banks so far in fiscal 2016. These bonds, also called perpetual bonds in market parlance, mirror the perpetuity of an equity instrument but are essentially debt in terms of returns and repayment.

“Capital-raising is an ongoing exercise and it depends on an individual bank’s needs and business growth. Banks do need capital if they have to meet Basel-III norms and there will definitely be some issuances of tier II (bonds) in the beginning of the calendar year," said N.S. Venkatesh, executive director and chief financial officer at IDBI Bank.

Basel-III norms mandate banks keep a minimum tier I capital adequacy ratio of 7% and tier II capital adequacy ratio of 2% within the overall capital adequacy ratio of 9% of risk-weighted assets.

Indian lenders will have to meet Basel-III norms by March 2019. According to ratings agency Moody’s, public sector banks will need to raise 1.5-2.2 trillion of capital in the four years through fiscal 2019.

Besides meeting Basel-III norms, banks would need capital to match any uptick in credit growth. The latest data from the Reserve Bank of India showed that growth in credit offtake increased to 11% as on 11 December, well above the average rate in the current fiscal year.

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