Few takers and a proposed exclusion from Tier I eligibility means perpetual bond issues are set to take a hit this year.
Conversely, Tier II bond issuances may rise, experts said. Banks are in the process of boosting their Tier-I capital currently.
Tier I capital, which comprises shareholder equity and reserves or retained earnings, indicates the core financial strength of a bank. Tier II, on the other hand, includes subordinated bonds, hybrid bonds, undisclosed and revaluation reserves etc.
“If Tier-I capital is increased, it creates more headroom for Tier-II capital,” said Ashish Agarwal, executive director, A K Capital, a loan syndicator.
That is because the amount eligible for inclusion in Tier-II capital as subordinated debt can go up to 50% of Tier-I capital, as per RBI guidelines.
However, RBI has recently indicated that hybrid capital, which includes perpetual bonds, may be excluded from Tier-I capital in future.
As a result, Agarwal expects Tier-II bond issuances to touch Rs 30,000 crore this fiscal from Rs 20,500 crore last. And he expects perpetual bond issuances to fall to Rs 5,000 crore from Rs 7,800 crore. The other reason is that there are fewer takers for perpetual bonds.
“Investor appetite for perpetual bonds is low,” he said.
A limited number of banks and provident fund houses are the takers and perpetual bonds are considered relatively illiquid, he added. Perpetual bonds are bonds with no maturity date. They are not redeemable but the bondholder receives a steady stream of interest ‘forever’.
In order to meet the credit growth of 20% as forecasted by RBI in the annual policy statement on Tuesday, banks are planning to raise more capital though not by way of perpetual bonds.
“The demand for perpetual bonds will come down because, the government has made a commitment in the union budget to make a capital infusion of Rs 16,500 crore via equity to public sector banks so that they can achieve 8% Tier-1 capital by March 31, 2011,” said P Sitaram, chief financial officer, IDBI Bank. The process of meeting Tier-II capital requirements for this fiscal has already kicked off. Corporation Bank is planning to raise Rs 550 crore in the first week of May.
“We are planning to raise funds via bonds towards meeting our Tier-II capital requirements. On the Tier-I front we are comfortable because we are hoping to get funds from the government,” said a senior official in Corporation Bank who did not wish to be named. More banks are in the offing with such issuances which includes names like Punjab National Bank and Bank of India, said sources in investment banking.
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