Gross bond issuances by banks surged to ₹90,000 crore in the April-December (nine months) FY23 against ₹70,000 crore in FY22, surpassing the previous high of ₹80,000 crore in FY17, as they scrambled to bridge the gap between credit and deposit growth, according to ICRA.

The credit rating agency expects overall gross bond issuances by banks to rise further to ₹1.3-1.4 lakh crore in FY23.

As credit demand picked up strongly in recent months, the overall gap between deposits and credit growth widened substantially. Incremental credit expansion stood at ₹12.7-lakh crore in FY23 (till December 16, 2022), while deposit accretion continued to trail at ₹8.9-lakh crore.

“To bridge this gap (of ₹3.8-lakh crore), banks have been relying on various sources of funding such as refinance from All India Financial Institutions (AIFIs), drawdown of excess on-balance sheet liquidity and debt capital market issuances. As a result, gross bond issuances by banks surged,” according to an assessement by ICRA.

Aashay Choksey, Vice President & Sector Head – Financial Sector Ratings, ICRA, expects the credit-to-deposit ratio for the banking system to firm up to 76.3-76.5 per cent by March 2023 from 74.8 per cent (as on December 16, 2022) and stand considerably higher than the low of 69.6 per cent seen during the Covid-19 pandemic. Accordingly, the overall gross bond issuances by banks is expected to rise further to ₹1.3-1.4-lakh crore in FY23.

Ajay Manglunia, MD & Head — Investment Grade Group, JM Financial, said: “Over the last few months, banks have seen healthy credit growth but low deposit growth. So, there was requirement of capital. Most of the banks have shored up capital, assuming credit growth will continue.

Opportunistic call

“So, rather than raise short-term (one-year) money via term deposits/certificate of deposit at 8 per cent, they are mopping up long-term resources via perpetual bonds at about 7.75-7.85 per cent. So, they are taking an opportunistic call.”

Marzban Irani, CIO - Fixed Income, LIC Mutual Fund, observed that banks need capital to support the robust credit growth. Banks are expected to continue mopping up funds via bond issuances till March-end 2023 due to good credit appetite in the economy.

Capital ratios

ICRA observed that besides helping shore up lendable resources, debt capital instruments (Tier-I and Tier-II bonds) qualify for inclusion in capital ratios. Banks also issue long-term infrastructure bonds to fund certain specified eligible assets. These debt instruments also boost the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), given the longer tenor of these instruments.

Given the risks associated with debt capital instruments, these are relatively higher priced than infrastructure bonds, the agency said. Hence, the choice of instrument is also driven by the availability of eligible assets for infrastructure bonds or the benefits that a bank can derive in its capital/liquidity ratios by issuing capital instruments even if the same is at a marginally higher cost.

ICRA’s analysis shows that while both public and private sector banks issued infrastructure bonds, public banks had a higher preference for Tier-I bonds while private banks issued more volumes of Tier-II bonds.

“Within overall bond issuances of ₹91,500 crore in 9M FY23, Tier-II issuance reached an all-time high of ₹47,200 crore, albeit on the back of large issuances by two large private sector banks. We expect infrastructure bond issuances to reach an all-time high in FY23,” the agency said.

Choksey observed that as large private sector banks are well placed on core capital, their share of Tier-I bonds in aggregate issuances was lower compared to public sector banks. In the past, the public sector banks have relied more on Tier-I bonds to meet the rising regulatory requirements, while the recent issuances have been driven by stronger credit growth.

Moreover, in the past, tight liquidity conditions had led to higher Tier-II and infrastructure bond issuances by private sector banks, which, in the agency’s view, will continue in the near term.

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