Banks’ resource teams are springing into action, after the Insurance Regulatory Authority of India (IRDAI) breathed life into the moribund market by easing conditions for insurers to buy these bonds.
AT1 bonds, also known as perpetual bonds, do not have a fixed maturity but offer relatively higher rates as they are considered quasi-equity instruments with greater investment risk. The proceeds increase the banks’ capital base.
Whereas
could raise up to Rs 7,000 crore, and are pricing a new series of perpetual items, market sources have said.
“The latest easing has increased investors’ appetite for AT1 bonds as banks will be able to raise more capital through these instruments,” said Sushanta Mohanty, Managing Director – Treasury at Bank of Baroda. “With the demand for credit coming, it’s useful for banks,” he said.
Growth in non-food credit, or loans to businesses and individuals, recorded growth of 13.7% in June this year from 4.9% a year earlier. This forced banks to raise more capital.
“This (the IRDA rules) will create a good amount of demand for AT1 bonds, especially for public sector banks, in the market as these bonds offer a decent spread compared to other assets available for investment. “said a Canara Bank spokesperson.
Other banks did not respond to ET’s questions by press time on Thursday.
AT1 bonds worth Rs 91,495 crore are currently outstanding at more than a dozen banks, with SBI leading the pack with almost a third of that. Bank of Baroda is the second largest issuer with Rs 10,731 crore outstanding, shows data compiled by
.
IRDAI on Wednesday allowed insurers to buy more perpetual bonds issued by banks, relaxing earlier rules they deemed unsustainable.
The relaxed rules, including the condition on dividend payments by issuing banks, will create space for more issuers, said Ajay Manglunia, Managing Director – Investment Grade Group, at JM Financial. “The rate differential between major borrowers like SBI and others should narrow now, benefiting the whole industry and better volumes in the market.”
The spread, or differential, generally remains at 20-30 basis points.
An SBI perpetual item is likely to earn between 7.75 and 7.90%.
India’s AT1 bond can yield 8.00-8.10%, all with a five-year call option, an exit route for investors.
Bank of India and
are also looking to increase AT1 bonds. Insurers can invest subject to regulatory filters.
“The total value of AT1 bonds held in a particular bank, at any time, must not exceed 10% of the total outstanding AT1 bonds of that particular bank,” the insurance regulator said.
Previously, there was a 10% purchase cap on new issues.
Further, an insurer can underwrite if an issuing bank would have reported net profits in two previous consecutive years without recording any discrepancy in asset classification and provisioning, identified by the Reserve Bank of India. Previously, the benchmark was tied to two consecutive years of bonus declarations.
Banks’ resource teams are springing into action, after the Insurance Regulatory Authority of India (IRDAI) breathed life into the moribund market by easing conditions for insurers to buy these bonds.
AT1 bonds, also known as perpetual bonds, do not have a fixed maturity but offer relatively higher rates as they are considered quasi-equity instruments with greater investment risk. The proceeds increase the banks’ capital base.
Whereas
could raise up to Rs 7,000 crore, and are pricing a new series of perpetual items, market sources have said.
“The latest easing has increased investors’ appetite for AT1 bonds as banks will be able to raise more capital through these instruments,” said Sushanta Mohanty, Managing Director – Treasury at Bank of Baroda. “With the demand for credit coming, it’s useful for banks,” he said.
Growth in non-food credit, or loans to businesses and individuals, recorded growth of 13.7% in June this year from 4.9% a year earlier. This forced banks to raise more capital.
“This (the IRDA rules) will create a good amount of demand for AT1 bonds, especially for public sector banks, in the market as these bonds offer a decent spread compared to other assets available for investment. “said a Canara Bank spokesperson.
Other banks did not respond to ET’s questions by press time on Thursday.
AT1 bonds worth Rs 91,495 crore are currently outstanding at more than a dozen banks, with SBI leading the pack with almost a third of that. Bank of Baroda is the second largest issuer with Rs 10,731 crore outstanding, shows data compiled by
.
IRDAI on Wednesday allowed insurers to buy more perpetual bonds issued by banks, relaxing earlier rules they deemed unsustainable.
The relaxed rules, including the condition on dividend payments by issuing banks, will create space for more issuers, said Ajay Manglunia, Managing Director – Investment Grade Group, at JM Financial. “The rate differential between major borrowers like SBI and others should narrow now, benefiting the whole industry and better volumes in the market.”
The spread, or differential, generally remains at 20-30 basis points.
An SBI perpetual item is likely to earn between 7.75 and 7.90%.
India’s AT1 bond can yield 8.00-8.10%, all with a five-year call option, an exit route for investors.
Bank of India and
are also looking to increase AT1 bonds. Insurers can invest subject to regulatory filters.
“The total value of AT1 bonds held in a particular bank, at any time, must not exceed 10% of the total outstanding AT1 bonds of that particular bank,” the insurance regulator said.
Previously, there was a 10% purchase cap on new issues.
Further, an insurer can underwrite if an issuing bank would have reported net profits in two previous consecutive years without recording any discrepancy in asset classification and provisioning, identified by the Reserve Bank of India. Previously, the benchmark was tied to two consecutive years of bonus declarations.
