Banks are increasingly issuing Tier II bonds as a strategic move to bolster their capital base. This development comes at a time when companies are raising unprecedented amounts through IPOs. The banking sector is projected to raise approximately ₹25,000 crore in the current financial year, with ₹10,000 crore already secured. This uptick is driven by three primary factors: a high demand for long-term debt instruments, anticipated cuts in the repo rate that would render current borrowing costs appealing, and regulatory obligations encouraging institutions to invest in these bonds. Collectively, these elements create an advantageous environment for banks to aggressively engage in the market.
Tier II bonds serve as long-term debt instruments that banks utilize to fortify their capital base. With a minimum tenure of five years, these bonds assist banks in adhering to Basel III capital adequacy standards and provide an additional cushion to support future credit expansion. They enable banks to acquire low-cost, long-term capital without the need to dilute equity, making them an efficient funding mechanism. Experts highlight that Tier II bonds also enhance a bank's capital-to-risk weighted assets ratio (CRAR), providing extra stability to its balance sheet.
CRAR is a crucial financial indicator that evaluates a bank’s capital relative to its risk-weighted assets, thereby assessing its financial robustness. It is calculated by dividing a bank's capital (both Tier 1 and Tier 2) by its risk-weighted assets, expressed as a percentage. A higher CRAR suggests the bank is better equipped to absorb potential losses, thus promoting financial stability and safeguarding depositors.
India's major banks are ramping up their issuance of Tier II bonds. Recently, SBI raised ₹7,500 crore at an attractive 6.93% through 10-year bonds, while ICICI Bank secured ₹1,000 crore in June. Experts predict that banks could collectively raise up to ₹15,000 crore by December. Many lenders had previously held off due to sufficient liquidity, lower deposit rates, and expectations of future rate cuts, which would lower borrowing costs. Last year, banks amassed nearly ₹31,000 crore through Tier II bonds. This renewed momentum indicates an improved market appetite and a pressing need for banks to strengthen their capital foundations.
Banks are increasingly turning to Tier II bonds as current market conditions make long-term borrowing more economical than raising funds through deposits. With corporate issuers favoring shorter-term bonds this year, there is a significant demand for long-duration, high-quality debt, creating a favorable window for banks.
Expectations of a repo rate cut in December motivate investors to secure long-term yields now. The lack of top-rated long-tenor bonds has heightened the appetite for Tier II issuances. SBI's competitively priced 6.93% bond has set a benchmark, boosting confidence among other banks. Additionally, provident and pension funds must comply with regulatory investment quotas, fueling demand for long-term corporate bonds.
Some banks also face the necessity to refinance older bonds whose call options have been exercised. With stable markets and attractive yields, banks view this as an opportune moment to fortify capital buffers rather than postponing for potentially uncertain conditions later in the year.
Despite the surge in Tier II bond issuances, experts note that Indian banks still primarily depend on deposits for growth and capital needs. Most large banks possess adequate internal capital generation and sufficient buffers, so future Tier II issuances will likely hinge on the continued attractiveness of market conditions.
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