Indian banks to raise bond funds to lock in low rates before window closes

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Indian banks are likely to jump into the bond market as soaring global inflation and a surprise hike in interest rates raise concerns about the outlook for borrowing costs.

Banks could rush to raise money for mortgage books and long-term infrastructure projects before rates spike, said Anand Dama, senior analyst at financial services research firm Emkay Global. The Reserve Bank of India May 4 surprised markets by raising its benchmark rates in an unannounced review of its monetary policy settings.

“The fundraising will be done mainly on [the] side of debt as banks try to increase long-term debt and lock it in at lower rates,” Dama told S&P Global Market Intelligence. Banks will likely use the proceeds to fund their mortgage portfolio and long-term infrastructure projects, the analyst added.

Rates will rise further

Reversing its ultra-loose policy, the Reserve Bank of India raised the rate at which it lends overnight money to banks to 4.4%. The central bank had cut the rate to a record low of 4.0% in May 2020 to support the pandemic-stricken economy. Further hikes are expected as global central banks tighten policy to ease inflationary pressures.

“The balance has tipped in favor of early monetary tightening,” Priyanka Kishore, head of India and Southeast Asia, macro and investor services at Oxford Economics, wrote in a May 6 note. . Kishore expects the central bank to raise rates again in June and follow up with further tightening in August and October. India’s central bank could raise rates faster if inflationary pressures increase, Kishore added.

India’s GDP growth is expected to reach 8.2% in 2022, according to the IMF. He also noted that real GDP contracted by 6.6% in 2020 before growing by 8.9% in 2021.

Banks pursue debt offerings

Several Indian banks have announced their intention to raise funds in the bond market, seeking to take advantage of still-low interest rates before they rise further as the central bank embarks on a tightening cycle. Politics.

The State Bank of India, the country’s largest bank by assets, said on May 10 that it plans to raise up to $2 billion through bonds. HDFC Bank Ltd., India’s largest private sector bank by assets, approved a Rs 500 billion bond issuance plan in April. In March, the Punjab National Bank also approved a capital raising through the issuance of Basel III compliant Tier 1 bonds totaling Rs 55 billion and Tier 2 bonds totaling Rs 65 billion.

In addition to larger note issues, other banks have announced fundraising plans. In March, Indian Overseas Bank raised 6.65 billion rupees through a Tier 2 bond offering, while The Karnataka Bank Ltd. announced that it would raise up to 3 billion rupees via Basel III compliant bonds. Jammu and Kashmir Bank Ltd. will raise Rs 10 billion in bonds through a private placement. Earlier in January, Federal Bank Ltd. announced that it will raise funds by issuing Tier 2 bonds in the amount of 7 billion rupees.

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Recovery stimulates credit growth

Economic activity in India has picked up and investment from the business sector and government is expected to increase. Bank credit grew 11.2% year-on-year to April 22, from 5.3% a year earlier, according to data from the Reserve Bank of India. This is the first double-digit credit growth since August 2019.

“Banks planning to raise funds in local or overseas markets need them for refinancing purposes and to fund future credit growth, which is expected to accelerate in line with India’s economic recovery,” said Nikita Anand, analyst at S&P Global Ratings. “We expect banks to be cautious in this market as interest rates are likely to rise, which will make fundraising more expensive,” Anand said.

Some banks had to cancel their bond issues in early 2022 due to market volatility following Russia’s invasion of Ukraine. “I suspect it would have resulted in muted fundraising earlier this year,” Anand said.

The overall common Tier 1 capital ratio of Indian banks stood at 86.8% at the end of March 2021, according to a December 28, 2021 report by the Reserve Bank of India. The ratio for most large private sector banks is above 15%, well above the minimum ratio of capital to risk-weighted assets of 9% required by the central bank.

“Most banks are well positioned in equity, however, banks may seek to raise debt capital to fund balance sheet growth,” said Nitin Aggarwal, analyst for Motilal Oswal Securities.

As of May 20, US$1 was equivalent to 77.81 Indian rupees.

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