Bank bond issuance set for all-time high of ₹1.3 lakh cr in FY2025: ICRA

Bond issuance by banks is expected to reach an all-time high of ₹1.2-1.3 lakh crore in FY2025, surpassing the previous high of ₹1.1 lakh crore in FY2023 (₹1 lakh crore in FY2024), with tight liquidity conditions and credit growth continuously exceeding deposit growth necessitating fund raising from alternative sources, according to ICRA.

For FY2025 (year-to-date), total bond issuances by banks stood at ₹76,700 crore, registering a year-on-year (YoY) growth of 225 per cent, and reached 75 per cent of the total issuances in FY2024, according to the rating agency’s assessment.

ICRA noted that with private banks focusing on reducing their credit-to-deposit ratio, fund raising through bonds is largely dominated by public banks this year.

Additionally, the bond issuances are supported by the government’s continued focus on infrastructural spending, the availability of sizeable infrastructure loan book, which is eligible to be funded through infrastructure bonds, and strong demand from insurance companies and provident funds for long-term issuances.

While these are required to have a minimum tenor of seven years, as per regulations, bonds with longer tenors of 10 or even 15 years are available owing to investor preference.

Growing traction

Sachin Sachdeva, Vice President and Sector Head – Financial Sector Ratings, ICRA, said: “During FY2015 to FY2022, public sector banks (PSBs) had a negligible share in infrastructure bond issuances. However, with improved capital position, tight funding position and sizeable infrastructure loan book, the PSBs became dominant in the issuance of infrastructure bonds and accounted for 77 per cent of banks’ infrastructure bond issuances in FY2023-FY2025 (YTD).”

He expects the trend to continue through FY2025, with PSBs likely to account for 82-85 per cent of bank bond issuances in FY2025 and infrastructure bonds expected to make up two-thirds of these issuances.

In the past, banks’ bond issuances were dominated by Tier 1 and Tier 2 instruments to help boost capitalisation metrics, especially when they were facing low profitability amid asset quality challenges. However, FY2023 onwards, issuances of infrastructure bonds have gained traction, as profitability improved.

ICRA noted that with the availability of a more stable and granular depositors’ base, PSBs have more wherewithal to provide long-term funding and usually have a larger share in the infrastructure sector than private banks (PVBs). Banking sector advances to the infrastructure sector are estimated at ₹13-14 lakh crore as on June 30, 2024, of which PSBs have a lion’s share of around 75 per cent.

The rating agency analysed a sample of 13 large banks (PSBs and PVBs) with infrastructure bonds outstanding at around ₹2.2 lakh crore as on August 31, 2024, against which they have an infrastructure loan book of around ₹11 lakh crore as on June 30, 2024.

Affordable housing segment

Sachdeva observed that in 11 of these 13 banks the infrastructure bonds outstanding as a proportion of their infrastructure book was less than 40 per cent, leaving sizeable headroom to raise funds through these instruments.

In addition, affordable housing assets are eligible for funding through infrastructure bonds and, hence, the overall eligible book is likely to be higher.

The agency said banks are expected to continue to fund infrastructure sector growth, and infrastructure bonds remain a key tool in raising long-term resources to fund this portfolio.

Additionally, the funds raised via these bonds are not subjected to statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirement, and hence they remain available to fund the portfolio; although, on the flip side, these funds are slightly costlier compared to deposits.

“Given the high credit-to-deposit (CD) ratio for PVBs, ICRA expects PVBs to curtail funding through bonds as this will optically worsen the CD ratio; however, PSBs will continue to pursue growth through infrastructure bonds, given the ample headroom available,” Sachdeva said.