Banks are all set to ramp up infrastructure bond issuance as inflows through fixed deposits stagnating with investors diversifying to mutual funds and equity markets chasing higher returns.
In all, banks have mopped up about ₹4,000 crore in the last one month and set a target to raise ₹40,000 crore by the end of this quarter.
The issuance of long-term bonds by banks comes in tandem with JP Morgan’s inclusion of India in its Emerging Market Global Diversified Index. A weightage of 10 per cent of India in the index could attract about $21 billion in investment by the end of the first quarter of 2025.
State Bank of India last month raised ₹10,000 crore through the first infrastructure bond with a 15-year maturity and coupon of 7.36 per cent followed by ICICI Bank raising ₹3,000 crore with a 10-year bond with coupon of 7.53 per cent.
Bank of India issued 10-year infrastructure bonds of ₹5000 crore priced at 7.54 per cent. Early this month, Canara Bank and Bank of Baroda raised ₹10,000 crore and ₹5,000 crore through issue of infrastructure bonds.
The infrastructure bond issuance will aid the Union Budget plans to invest ₹11.11 lakh crore in FY’25.
Unlike funds mopped up through deposits, for which banks must maintain 4.5 per cent of the amount as cash reserve ratio with RBI and invest about 18 per cent in securities to meet statutory liquidity ratio obligations, infrastructure bond proceeds can be fully deployed in lending activities.
Sachin Sachdeva, Vice President, Sector Head - Financial Sector Ratings, ICRA said the infrastructure bonds can help banks manage the asset liability mismatches, given the long tenure of both liabilities and assets.
Adjusted for operating cost of mobilising deposits, SLR and CRR requirements on deposits, the cost of infra bonds is not materially higher than incremental cost of deposits. Further, Infra bonds, even if mobilised at slightly higher rates forms miniscule part of overall funds of the bank, he said
Palka Arora Chopra, Director, Master Capital Services said as loan demand increases and bank deposit growth lags, banks are seeking alternative ways to raise funds.
Infrastructure bonds offer attractive spreads and have strong appeal among long-term investors. However, the spreads are justifiable as the yield curve is currently inverse and banks raising longer maturity duration funds is cheaper for the bank, she said.
Though infrastructure lending will be relatively small, banks need to be cautious as most projects face delay and cost over-run.
As per the Ministry of Statistics and Programme Implementation report on infrastructure projects revealed that 449 infrastructure projects, each with investments exceeding ₹150 crore, suffered cost overruns totalling over ₹5.01 lakh crore as of last fiscal.