Public sector banks are making a beeline for the bond market with issuances of Tier-II capital bonds, subordinated debt and perpetual bonds to boost capital adequacy levels in anticipation of a strong credit growth.
As many as four banks are in the market with their perpetual bond issues still open, while some of the Tier-II and subordinate debt bond issuances have been lapped up.
Union Bank of India on Wednesday raised Rs 140 crore (Rs 1.4 billion) through subordinated perpetual bonds with a coupon rate of 9.10 per cent paid annually.
Allahabad Bank also raised Rs 150 crore (Rs 1.5 billion) subordinated perpetual bonds. These bonds carry coupon rate of 9.2 per cent.
"There is a lot of liquidity in the market and investors have faith in public sector banks," said S K Kalra, general manager, Allahabad Bank, which raised as much as Rs 900 crore (Rs 9 billion) a couple of days earlier from the sale of Tier-II and subordinate bond issues.
PSBs are rushing through bond issuances to report healthy capital adequacy ratios by the year-end in anticipation of a healthy credit growth for the quarter ending March 31. These banks are seeking to maintain the 12 per cent capital adequacy ratio to follow international guidelines.
Indian lenders' loans have grown 18 per cent in the year so far. PSBs seem to have contributed most to the overall credit growth as private and foreign banks have curtailed loan expansion plans.
"PSBs are conscious that they need to shore up the capital keeping in mind their past and future credit growth," said Ashish Agarwal, executive director, AK Capital.
Most of the bonds offered coupon ranging from 9 per cent to 9.5 per cent, including those for perpetual bonds where only the issuer has the option to recall the bonds. While most investors have lapped up the Tier-II and subordinate bond issues, with some of them closing well ahead of the scheduled closing date, perpetual bonds are languishing.
One of the key reasons for the investors' aversion to perpetual bond is the indefinite maturity period, creating concerns of asset liability mismatch among commercial banks. Commercial banks' liabilities mainly comprise deposits maturing in three to five years, but perpetual bonds don't have a fixed maturity.
In an attempt to close the sale, banks are now subscribing to each other bonds. Surprisingly, even Life Insurance Corporation of India, the nation's biggest insurer and also one of the biggest investor in bonds, has refrained from investing in the perpetual bonds issues.
"LIC expects higher coupon than those offered by the banks to make it attractive," said Agarwal.
