IDBI raising costly debt to fund growth

IDBI Bank is raising costly money to fund its expansion plans. At present it is raising non-convertible debentures of five and ten years at 7.35 per cent and 7.70 per cent respectively. It raised another Rs 500 crore via NCDs at 7.60 per cent last month.

Banking behemoths State Bank of India (SBI) and ICICI Bank raised tier-II bonds recently to meet the robust credit growth. After having converted into a banking company last year, IDBI Bank is still building its net worth.

Analysts said IDBI Bank relatively does not have sufficient tier I capital to fund its growth and credit requirement. Consequently, there is less headroom for the bank to raise tier II capital. Hence it is continuing its tradition to raise resources at higher cost to funds its growth.

State Bank of India the country's largest bank, closed an issue of Tier-II bonds on Monday after raising Rs 3283 crore ($709 million), merchant bankers said. The issue, which opened on November 29, had a core size of Rs 1000 crore with an unspecified greenshoe option.

The bonds, assigned 'AAA/stable' or highest safety rating by Crisil and CARE, have a tenor of 113 months and carry a coupon of 7.45 per cent, payable annually.

Syndicate Bank had also raised Rs 5 billion through issue of unsecured, redeemable, non-convertible subordinated bonds eligible for Tier II capital. The bonds issue of Rs 5 billion, inclusive of a greenshoe option of Rs 2 billion.

Banks have been raising tier-II bonds on account of meet their credit requirements amid tight liquidity in domestic banking system. Another reason being that rates are showing an upward bias with yields having inched up more than 55 basis points since July 2005.