Public sector lender Andhra Bank is planning to reserve a part of its yet-to-be-launched infrastructure bond for retail investors.
The bank is planning to raise Rs 500 crore with a green shoe option of raising another Rs 500 crore.
CVR Rajendran, chairman and managing director, Andhra Bank, said, "We are planning to reserve about 40% of the infrastructure bond for retail investors. We will take the requisite permission from Reserve Bank of India."
"We have not yet launched the bond in the market, but we are looking at a coupon rate of 9.30%," Rajendran said.
Pawan Agrawal, senior director, Crisil Ratings, which rated the Andhra Bank bond issue, said, "Given the exemption from statutory reserve requirements and priority-sector obligations, these bonds will be cost-effective for the issuing bank. The benefit would be around 75 basis points compared with longer-maturity deposits. The bonds will also help banks improve their asset-liability profile."
Crisil has given Andhra bank's bond issue a stable rating of AA+.
Ratings have factored in the strong support that the lender would receive from the government since it is adequately capitalised. These rating strengths are partially offset by the bank's modest asset quality and earnings profile.
During the April-June quarter, farm loans dragged down the profits of the bank. Net profit dropped 53% to Rs 107 crore for the quarter from over Rs 231.28 crore reported in the year-ago period.
The bank had to classify Rs 300 crore as non-performing loans, and also take a hit of Rs 150 crore on the interest earnings on these loans.
The farm loans became stressed after the government announced a farm loan waiver in Andhra Pradesh, which led to farmers stopping repayment of loans to the bank. The bank has a farm loan portfolio of Rs 15,000 crore in Andhra Pradesh and Rs 7,000 crore in Telangana.
According to Crisil, the RBI's move to revise the regulations on long-term bonds (with a minimum maturity of seven years) for financing infrastructure projects and for affordable housing -- by scheduled commercial banks -- followed a similar announcement in the union budget on July 10. Apart from statutory liquidity ratio and cash reserve ratio exemptions, advances against these bonds are also exempt from priority-sector lending obligations.
Around a fifth of outstanding banking sector credit as on March 31, 2014, was to infrastructure and affordable housing segments. Crisil estimates at least Rs 3 lakh crore of loans to these sectors – both current and prospective -- would qualify for funding through infrastructure bonds in the current fiscal.