Bond street warms up after a 6-month lull

Last Updated: Fri, Nov 16, 2012 19:50 hrs

After a gap of almost six months, banks are again planning to raise funds by way of private placement of corporate bonds.

This is because credit growth is picking up in the the second half of the current financial year. While state-run Oriental Bank of Commerce (OBC) has planned to raise Rs 1,200 crore next week by issuing lower tier-II bonds, another government-owned lender, Syndicate Bank, might also hit the bond street to raise Rs 1,000-1,500 crore.

OBC Chairman and Managing Director S L Bansal told Business Standard these would be 10-year bonds and the bank was looking for a coupon rate in the range of 8.90-8.93 per cent. The money raised would fund credit expansion, as deposit growth has been slowing. OBC had reported 12.5 per cent credit growth for the year till September 30, while deposit growth was 9.8 per cent.

Coupon rate is the interest rate stated on a bond and expressed as a percentage of the face value. Tier-I capital is equity and disclosed reserves; tier-II capital is undisclosed reserves, general loss reserves and subordinate term debts. The components of tier-II capital can be split into lower tier-II and upper tier-II. Lower tier-II is comparatively cheap for banks to issue.

As on September 30, OBCs capital adequacy ratio was 12.06 per cent, with tier-I at 9.69 per cent. Reserve Bank of India norms say the amount eligible for inclusion in tier-II capital as subordinated debt can go up to 50 per cent of tier-I capital.

According to market sources, it is after nearly six months that a bank is raising funds by using this route, as credit demand has picked up. “Dena Bank had raised Rs 850 crore about six months earlier by issuing 15-year bonds with a call option at the end of the 10th year. The coupon rate was 9.23 per cent,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. Next week, he said, even Syndicate Bank might raise Rs 1,000-1,500 crore by private placement of bonds.

Coupon rates, said Manglunia, had dropped in the past six months. “For an AAA-rated 10-year bond, the coupon rate has dropped by about 25 basis points,” said Manglunia. 'AAA' is the highest rating given by credit rating agencies and it signifies a company has extremely strong capacity to meet its financial commitments.

According to bond issue arrangers there would be good demand for these bonds among fund houses. According to issue arrangers, in the months to come, more banks might raise funds using this route, as coupon rates could soften further.

Bank credit grew 16.2 per cent year-on-year to Rs 48,59,751 crore for the fortnight ended November 2, shows data released by RBI yesterday.

The first half of the current financial year has been sluggish in terms of credit growth. Bankers expect the second half to be better. In the second-quarter monetary policy review last month, RBI had revised the credit growth projection downwards to 16 per cent from the 17 per cent projected in April and July. However, deposit growth projection was kept unchanged at 15 per cent.

More from Sify: