Bond issues by banks are picking up pace with both PSU and private banks looking to tap the market through long-term bonds to shore up their capital and support lending, as investors look to lock-in their money at higher yields.  

Typically, after receiving fresh board approval for fund-raising during a fiscal year, banks enter the market after the first quarter, with a majority of bond issues happening during the second half of the year. However, this year, a number of banks have already lined up bond issues and more are expected to follow suit in the coming weeks.

Last week, Kotak Mahindra Bank raised ₹1,895 crore via 7-year infrastructure bonds at 7.55 per cent coupon. IDFC First Bank, on Monday, raised ₹1,500 crore via 10-year, tier-II bonds at 8.40 per cent. Punjab National Bank raised ₹3,090 crore via tier-II bonds at 7.74 per cent on Tuesday.

Also read: Asian Development Bank may look at fresh issuance of rupee denominated bonds

Going ahead,State Bank of India is expected to tap the market by the first week of July via additional tier-I (AT-1) bonds.

Rate trajectory

Industry players said banks had been waiting for RBI’s June policy and the MPC minutes for some indication on the interest rate trajectory. Following the hawkish minutes amid a rate tightening environment globally, any expectations of a rate cut in India have been pushed farther down the line.

Add to that the heavy supply of central and state government bonds, and expected elevated borrowing from NBFCs and other financial institutions through FY24, market participants don’t expect yields to ease anytime soon. This has prompted banks, including private banks, to make a head start and raise funds before the influx of other large regular issues in the market, also given the fact that credit growth continues to outpace deposits.

“HDFC Bank may have to continuously tap the market for tier-I and tier-II bonds post the merger. SBI also needs to raise tier-I bonds. Once they come in, everyone else will follow,” said industry expert Venkatakrishnan Srinivasan, Founder of Rockfort Fincap.

“Many banks have taken necessary board approvals for AT-1 bonds, Tier-2 and infra bonds, so we can expect a number of banks, including private banks, to tap the bond market in the next few weeks. Since infrastructure bond issuances are also picking up, we can expect the overall bank bond supply to increase,” he added.

Following SBI, other large PSU banks such as Bank of Baroda, Canara Bank and Union Bank of India are also expected to issue AT-1 bonds as they build capital reserves ahead of the roll-out of the ECL (Expected Credit Loss) provisioning norms, industry participants said.

The ECL framework is expected to be introduced in the coming months, with implementation effective from April 2025.

In a recent note, ICRA said while overall bank bond issuances in FY24 are expected to be lower than ₹90,000 crore, compared to the peak of ₹ 1.1 lakh crore in FY23, AT-1 issues are set to be steady at similar levels.

The rating agency pegged AT-1 issues for the current financial year at FY22-FY23 levels of ₹30,000-33,400 crore, with outstanding tier-I bonds increasing to ₹1.3 lakh crore as of March 2024, from ₹1.2 lakh crore a year ago.

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