ICICI Bank raises money at 10.10%

The borrowing costs of banks are on a steep climb. India's second-largest bank ICICI Bank is offering 10.10 per cent on Rs 225 crore of triple-A rated perpetual bonds. This is much higher than some of the issues by other banks recently.

Kolkata-based UCO Bank, rated double-A, a notch below ICICI Bank, raised perpetual debt in May 2006 at 9.35 per cent.

Similarly, Chennai-based Indian Overseas Bank (IOB) raised Rs 200 crore of perpetual debt in May 2006, with the coupon at 9.15 per cent. IOB bonds are rated double-A+.

Perpetual bonds are quasi equity and irredeemable as they do not have any expiry date. Investors wanting to exit from perpetual bonds have to do it by selling them in the secondary market. It is the same as encashing investments in normal bonds before maturity. These bonds are considered as core (Tier-1) capital.

A senior ICICI Bank executive said the bank was offering a higher coupon on perpetual bonds because of market conditions.

"The coupons on Tier-2 bond issues have gone up by almost 2 percentage points over the last two months, and the yield on 10-year government security has risen from 8 per cent at the end of June to over 8.30 per cent now. The higher coupon on the perpetual bonds is a result of market influences," he said.

Banking analysts said ICICI Bank could be paying 10-20 basis points higher than market rates as most other banks had exhausted their investment limits for ICICI Bank.