Tier-1 capital raise by banks halves to Rs 17,516 crore in 2023-24

Healthy capital ratios, high interest rates, weak appetite lead to lower issuances

With a strong capital adequacy base and higher interest rates, the activity of raising debt capital -- tier I and tier II bonds -- by banks declined sharply in Financial Year 2023-24.

Banks raised about Rs 17, 516 crore through the additional tier I (AT1) bonds in Fy24, which was 49.8 per cent less than the amount raised in Fy23, according to Prime Database.

Country’s largest lender State Bank of India has raised Rs 8,101 crore through AT-1 bonds in FY24. Other significant issuers of AT1 bonds were two public sector lenders, Punjab National Bank and Canara Bank.

Senior executive with a large PSB said the internal accruals on the back of enhanced profitability improved the capital adequacy in the last two years. Hence, the dependence of external support through debt capital -- AT1 and tier II bonds -- was lower. 

Also, there is less interest from investors in AT1 bonds after private lender Yes Bank wrote down these instruments due to deteriorating financial conditions in 2020. 

These are fixed rate instruments and lenders do not want to lock themselves into high interest rates instruments for the long term especially when the signs of rate softening cycle are around, said bond market dealer. 

According to Care Ratings review of Q3Fy24 performance of banks, the median Capital Adequate Ratio (CAR) of Scheduled commercial banks dropped by 18 basis points Year on Year (YoY) basis to 15.9 per cent at the end of December 2023.

It remained comfortably above the regulatory requirement of 11.5 per cent, indicating a stable position.

Beside healthy CAR, the amount for the number of AT1 bonds becoming eligible for call option was low at Rs 11,900 crore in Fy24, hence less demand for replacement of bonds, said an executive with rating agency.

The offtake of capital through tier II bonds by banks and non-banking finance companies also declined by half to Rs 24, 529 crore in Fy24 from Rs 49,763 crore in Fy23. SBI was also the largest issuer of tier II bonds at Rs 10,000 crore. Two other significant issuers of tier II bonds in Fy24 were Bank of Baroda and Punjab National Bank, according to information provided by Prime database.