The cost of capital raised by Indian banks through international bonds has gone up in the wake of the subprime crisis in global credit markets, but the banks have other options to raise funds such as private placements with US institutional

On target: RBI deputy governor V. Leeladhar says banks are on course to meet the Basel II norms on capital adequacy by March.

However, the banks are not affected by the US subprime crisis and are largely on course to meet the Basel II guidelines on capital adequacy by March 2008, Reserve Bank of India deputy governor V. Leeladhar said at the meeting.

Indian banks, late entrants to global debt markets in 2004, have issued about a fifth, equivalent to $6 billion, or Rs24,600 crore, of the bonds raised by Asian lenders so far this year. The bonds constitute the second largest set of borrowings among banks in the region in the last three years.

“There may be a case of liquidity drying out in bonds for Indian banks," said Richard Grainger, director of debt capital markets at Barclays Capital, the investment banking arm of Barclays Bank Plc. “Huge issuances by Indian banks have negatively impacted the secondary market performance of these bonds."

The spreads between the Asian banks and Indian banks have moved from 0.25% to 0.75% from the beginning of 2007 to now.

But Grainger said there is still room for Indian lenders to raise capital.

“From a global standpoint, there is still enough room for Indian banks to tap the international bond market," he told attendees at the Federation of Indian Chambers of Commerce and Industry-Indian Banks’ Association Global Banking Summit.

Private placements with US institutional investors are unregistered, often unrated borrowings sold directly to US investors who are looking to increase exposure to India.

“We are advising several Indian clients to tap this deep market that is growing very fast," Grainger said, without more detail.

Another option, he said, could be medium-term note programmes such as bond issuances transacted in different tranches in regional currencies such as the Hong Kong dollar and Singapore dollar to diversify the currencies in which bonds are issued.

There are also other new products such as residential mortgage-backed securities among other asset-backed instruments that could serve as a large source of funding for Indian issuers in the short term. Although such avenues exist in India today, they remain unexplored.

New vistas may also open up in the schuldschein (credit-linked note) market in Germany, similar to the US private placement market.

Still, in the longer term, Indian banks will have to tap the global bonds market for accessing deeper sources of capital when international bond markets become a little less risky.

Reuters contributed to this story.