A lack of interest from investors is threatening to derail the efforts of cash-strapped Indian banks to raise the additional capital they need to comply with tougher Basel III rules.
The first sales of Basel III-complaint subordinated bonds flopped after a resounding rejection from investors. Now, bankers are unsure if any institution will be able to muster demand for the new products for at least the next six months.
"We tried, but the only reaction we got from investors was: 'Basel III - what kind of animal is this'?" said a bemused head of debt capital markets at a private sector bank.
His bank attempted to sell a new-style sub bond last week, but was eventually forced to revert to the tried-and-tested Basel II structure - even though it will lose 10% of the capital benefit from the notes each year from January 1, when Basel III rules kick in.
Central Bank of India, Oriental Bank of Commerce, United Bank of India and even ING Vysya Bank have all tried and failed to sell Basel III-compliant bonds in the past few weeks.
The Indian banking sector may be among the most in need of a capital boost under the new Basel III regime. Yet, it is becoming clear that it is also one of the least prepared for the transition.
If local markets continue to be unavailable for fundraising, banks may need either to pay up to access overseas capital or shrink their loan books.
"The transition to Basel III is not coming at a good time for Indian banks as they are facing asset-quality issues and the overall business outlook looks grim," said another banker.
There are several hurdles to these new bonds in India, not least being the lack of understanding on the buy side.
The loss-absorption features required for sub bonds to count towards Basel III capital may put the paper beyond the reach of investors like pension funds and insurance companies, if their funds are not allowed to invest in equities.
To qualify as additional Tier 1 or Tier 2 capital, bonds will need to write down to zero if the RBI deems a bank to