It's Tier-II bonds time for PSBs

A host of public sector banks (PSBs) including Bank of India, Andhra Bank, State Bank of Travancore, Indian Bank and Indian Overseas Bank are readying to raise resources through Tier-II bonds.

These bond issues are likely to hit the market either in the last week of December or in the first week of January, said market sources.

Indian banks' Tier-I capital consists of equity capital and free reserves, while Tier-II capital consists of undisclosed reserves, a part of revaluation reserves, and subordinated debt. Banks can raise Tier-II capital up to a maximum 50 per cent of Tier-I capital.

Several bank bond issues are soon going to hit the market. This is in expectation of the heavy liquidity inflow expected in January when the government run, special deposit scheme for provident funds and trusts stops accepting reinvestments, said Gopikrishnan, senior vice president, I-Caps.

About Rs 10,000 crore is expected to flow into the system in January due to the special deposit scheme being partially wound up and banks are keen to tap these funds.

These banks are all raising Rs 100-200 crore per head; they are keen to raise resources through Tier-II bonds since the interest rates and liquidity in the market are fast improving.

Some of these banks also have public issues lined up for the capital markets but these will entail regulatory approvals from the Government of India.

Bank of India has got board approval to raise Rs 100 crore and Indian Bank is set to come out with its initial public offering. Banks are all in need of capital in preparation to comply with the new stringent Basel II risk norms applicable in March 2006.

The new norms will see the capital adequacy ratios of banks dip since banks will have to provide for not only credit and market risk but also for operational risk.

Another reason for raising of resources is the strong growth of credit seen this year. Banks are seeing a 20 per cent growth in credit numbers on a year-on-year basis up from a mere 11 per cent in the previous fiscal. About a week ago both Syndicate Bank and Allahabad Bank had also raised Tier-II bonds.

Other issuances in the corporate bond market include the five year issuance by Housing Development Finance Corporation to raise Rs 50-100 crore and the Regional Electricity Corporation is also in the market trying to tie up Rs 500 crore of funds for a tenure of ten years with a swap arrangement to convert the same into foreign currency.