Banks make beeline to raise capital bonds after IRDAI push

Banks’ resources teams are swinging to action, after the Insurance Regulatory Authority of India (IRDAI) breathed life into the moribund market by easing the conditions for insurers to buy into these bonds.

AT1 bonds, also known as perpetual bonds, do not have any fixed maturity but offer relatively higher rates as those are considered quasi-equity instruments with a larger risk to the investment. The proceeds augment banks’ capital base.

While

may raise up to Rs 7,000 crore, , and are evaluating a new series of perpetual papers, market sources said.

“The latest relaxation has increased investor appetite for AT1 bonds as banks will be able to raise more capital via such instruments,” said Sushanta Mohanty, general manager – treasury at Bank of Baroda. “With credit demand coming up, it is helpful for banks,” he said.

The non-food credit growth, or the loans given to companies and individuals, recorded 13.7% growth in June this year compared with 4.9% a year earlier. This has necessitated banks to raise more capital.

“This (IRDA rules) shall create a good amount of demand for AT1 bonds, especially for public sector banks, in the market as these bonds offer decent spread over other assets available for investment,” said a spokesman for Canara Bank.

Other banks did not reply to ET’s queries till press time Thursday.

AT1 bonds worth Rs 91,495 crore are currently outstanding from more than a dozen banks, with SBI leading the pack with nearly a one-third share of this. Bank of Baroda is the second largest issuer with Rs 10,731 crore outstanding, show data compiled by

.

The IRDAI on Wednesday allowed insurers to buy more perpetual bonds issued by banks, easing the earlier rules which they had found unviable.

“The revised IRDAI norms for AT1 papers shall create additional demand for such papers besides the conventional investors who have supported large AT1 bonds in the recent past” said Ashish Agarwal, executive director at AK Capital, one of the leading arrangers.

The relaxed rules, including the condition on dividend payments by the issuer banks, will create space for more issuers, said Ajay Manglunia, managing director – Investment Grade Group, at JM financial. “The rate differential between top borrowers like SBI and others should narrow now, benefitting the whole industry and better volumes in the market.”

The spread, or differential, generally stays at 20-30 basis points.

A perpetual paper by SBI is likely to yield in the range of 7.75-7.90%.

India’s AT1 bond may yield 8.00-8.10%, all with a five-year call option, an exit route for investors.

Bank of India and

too are seeking to raise AT1 bonds. Insurers can invest subject to regulatory filters.

“The aggregate value of AT1 bonds held in a particular bank, at any point of time, shall not exceed 10% of the total outstanding AT1 bonds of that particular bank,” said the insurance regulator.

Earlier, there was a 10% purchase cap on new issues.

Besides, an insurer can subscribe if an issuing bank would have reported net profits in two preceding consecutive years without recording any divergence in asset classification and provisioning, identified by the Reserve Bank of India. Earlier, the benchmark was linked to two consecutive years of bonus declarations.