Buoyed by investor sentiment overseas, lenders rush to raise first perpetual bonds; SBI may take the lead.
With Basel-III kicking in from the current financial year, banks are in desperate need of capital to meet the new norms. Indian banks are looking at raising perpetual bonds overseas in dollars, for these would qualify for tier-I capital under Basel-III.
Perpetual bonds are debt instruments with no due date. They are referred to as hybrid capital since they carry features of both -- debt and equity. Under Basel-III, there are stricter norms for issuing these bonds.
A senior official from the Reserve Bank of India (RBI) said some Indian banks are looking at issuing Basel-III compliant tier-I bonds abroad. “They may raise overseas first because the environment exists. Here, nobody is very sure,” said Chandan Sinha, chief general manager, RBI. He said banks were yet to finalise a quantum.
These bonds are fairly new for global investors too although there have been a few issuances. This month, Singapore-based DBS Bank tested the market with Basel-III compliant tier-I securities of SGD 800 million. The bonds were oversubscribed, indicating investor demand remains solid.
Bankers said that among Indian lenders, the State Bank of India (SBI) is likely to issue the first such bond overseas. “We will wait for the SBI to enter the market and set a benchmark for Indian issuers,” said a senior treasury official with a public sector bank. “Also, banks need to have a stronger capital base to be able to attract investors for the new instrument... Such banks first need to shore up their capital base by raising funds via Qualified Institutional Placement.” .
According to CRISIL, Indian banks need Rs 3.4 lakh crore non-equity capital under Basel-III norms by 2018. Banks have already raised Rs 6,000 crore of tier-II bonds under new norms. “The key challenge lies in raising tier I non-equity instruments, due to their riskier features of coupon discretion and principal loss absorption at specified capital thresholds,” said Pawan Agrawal, senior director, CRISIL.
In order to develop the domestic corporate bond market, Sinha said the RBI is working on allowing credit enhancement for lower-rated companies. It would allow these companies to have ratings for their debt enhanced by third parties such as banks that back them with additional collateral or insurance. Tthe guidelines, he added, are likely to be released by December.
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