bAhead of Basel-III norms that will kick in from January 1, banks are busy shoring up their tier-I capital through perpetual bonds.
After United Bank of India, which raised Rs 300 crore on Monday, IDBI Bank raised Rs 450 crore, while another state-run lender, Indian Overseas Bank, (IOB) will raise Rs 800 crore shortly.
Perpetual bonds have no maturity date. The bonds are not redeemable but the bondholder receives a steady stream of interest forever. December is the last month in which banks can boost their tier-I capital by way of perpetual bonds. From January 1, Basel-III will be introduced under which perpetual bonds do not qualify for tier-I capital.
Basel-III is the global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. Tier-I capital is the core measure of a bank’s financial strength from a regulator’s point of view. Under Basel-III norms, equity capital and retained earnings are the predominant form of tier-I capital. IDBI Bank raised Rs 450 crore by issuing perpetual bonds with a 10-year call option at a coupon rate of 9.40 per cent. According to issue arrangers, it got fully subscribed by investors unlike the United Bank of India issue. “The United Bank of India issue did not get subscribed because it was carrying a lower coupon of 9.27 per cent. A part of the issue is lying with the merchant bankers,” said an issue arranger, not willing to be named.
According to the arranger, IDBI Bank’s coupon rate was higher and IDBI Bank is perceived as a better bank due to which the response was good.
According to another issue arranger, IOB, planning to raise Rs 800 crore, will have to price the bonds at least at 9.40 per cent. Else, it may not find investors.
“We are waiting for the Reserve Bank of India’s (RBI) mid-quarter monetary policy review. We will raise the funds after the review and shall price it accordingly,” said an IOB official. These bonds will also have a call option after 10 years. The incremental equity requirement due to enhanced Basel-III capital ratios is expected to be in the range of Rs 75,000 crore to Rs 80,000 crore by end-March 2018 for public sector banks, according to the RBI report on “Trend and progress of banking in India for 2011-12” released last month.
