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C. Shivkumar

Bangalore, Nov. 9 Public sector entities are expected to swamp the domestic financial markets with bonds worth Rs 9,000 crore over the next four months.

Public sector banks (PSBs) alone are expected to raise Rs 5,500 crore during the period. Banks in the fray to raise resources through bonds include Bank of India, State Bank of India, Union Bank of India, Vijaya Bank, UCO Bank and Dena Bank.

In addition, transmission utility, PowerGrid Corporation of India Ltd, is expected to raise Rs 3,300 crore during the current financial year. Banks are raising the resources to beef up their respective Tier II capital, for propelling their asset growth and partly for offsetting the impact on capital standards after migrating to Basel II next financial year.

Though the prescribed regulatory capital requirement is only 9 per cent, PSBs have been maintaining their capital-to-risk weighted asset ratios of 12 per cent. Most banks expect capital to fall below 12 per cent after the migration. Bankers said that almost all of them expected to push up their advances portfolio by 25 per cent over the last financial year. This was despite the fact that credit growth so far this year has not been very encouraging. Credit has been about Rs 97,000 crore or about 35 per cent lower than that in the corresponding period last year.

Bankers, however, are hopeful that the peak season is likely to see the credit off take accelerating, especially from the farm and rural sectors. Besides, most of them would be requiring the funds to migrate to Basel II, they said. Although under Basel II, risk weights on some assets would actually reduce from the current level of 100 per cent to 50-75 per cent, there were other categories of assets that would see risk weights rising to as high 175 per cent.

Banks with international operations are expected to comply with the Basel II norms by the end of this financial year. The deadline for other banks is March 2009. However, Vijaya Bank has indicated compliance by September 2008 itself, especially since it plans to have international operations.

The rush for resources comes at a time when investors appeared to have lost their appetite for bank bonds. This was evident from the pricing of the last few issues. Triple "A" rated 10-year bonds were priced at close to 10 per cent. Nabard’s 5-year bond issue of Rs 200 crore issue was priced at 9.6 per cent. The HDFC 10-year bond issue that closed on October 31 was priced at 9.5 per cent.

Effective prices on both these issues, inclusive of placement costs, are expected to be about 10 per cent. The high prices, bankers said, were partly due to the dominance of the Life Insurance Corporation of India (LIC). LIC is the single largest subscriber for bank bonds and a tough negotiator, demanding front-end discounts, so as to ensure that the yield- to-maturity remained favourable.

More Stories on : Public Sector Banks | Corporate Bonds | Power

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