Ahead of State Bank of India’s proposed bond issue for retail investors, the Reserve Bank of India (RBI) today asked banks to ensure floating rate instruments were delinked from fixed-deposit rates.
In addition, the regulator mandated that banks issue a warning and went to the extent of specifying the wording and the font size that needed to be inserted in offer documents and application forms.
Besides, it wanted banks that raised Tier-II capital through the subordinated debt route to ensure the distinction between fixed deposits and bonds was clearly understood.
Tier-II capital is reckoned as part of the overall capital base of a bank and is included in calculating the capital adequacy ratio. In contrast, deposits are liabilities which do not reflect the strength of the bank. Retail deposits up to Rs 1 lakh come with an insurance cover.
In case of liquidation of a bank, depositors with a balance of up to Rs 1 lakh would get priority in collection of their dues over bond holders.
“All the publicity material, application form and other communication with the investor should clearly state in bold letters (with font size 14) how a subordinated bond is different from fixed deposit, particularly that it is not covered by deposit insurance,” RBI said in a circular issued this evening.
While SBI, the country’s largest lender, is yet to firm up its plans for a retail bond issue, it has indicated its intent to raise up to Rs 5,000 crore through the route. The capital-raising will be done in tranches and the bonds are expected to have a 10-year tenure. So far, SBI is the only bank to have announced its intention to tap retail investors to bolster its capital base.
“This will help us to communicate the difference and keep the expectation of prospective investors under check,” said a senior SBI executive.
RBI said the steps mentioned in the circular were important from the point of view of enhancing investor education related to risk characteristics of regulatory capital instruments.
