The bank is entering the debt market with a Rs 600 crore issue on March 5. BoB which was expected to enter the market with a seven year paper carrying a coupon of 14.1 per cent annualised and a ten year paper carrying a coupon of 14.5 per cent annualised has revised the coupons downwards to 13.75 per cent and 14.30 per cent, respectively. This is well within the 200 basis points ceiling that the Reserve Bank has set for banks tier-II capital issue.

The issue, has been rated `AAA' by ICRA. This is the first such bank issue to be rated with the highest rating by an agency. According to sources, BoB's capital adequacy ratio (CAR) will be shored up to 13 per cent in March 1999 after the Rs 600 crore bond issue. BoB sources said that the base size of the issue is Rs 400 crore with a green-shoe option of Rs 200 crore.

DSP Merrill Lynch and JM Financial are the lead managers to the issue while BoB Capital Market are advisors.

Analysts have interpreted the move as a strategy to raise "cheap money". "BoB will be able to raise seven year money at around 14 per cent. Since the subordinated debt is not subject to reserve requirements--cash reserve ratio (CRR) and statutory liquidity ratio (SLR)--the bank will be in a position to raise long-term resources at a moderate cost," senior bank analysts said.

"We have priced the ten year issue aggressively as we want more long term resources. This will bring down our transactions costs as we do not have hit the market after every five years. We want to pick up the money at one go", sources said. Currently the ten Government of India securities are ruling at 12.20 per cent levels and are expected to come down to 12 per cent levels after the cut in the rates.

"There will be many takers for the ten year paper. Provident funds, trusts and the insurance companies stand to gain a lot through the debt issue. No AAA rated paper except the financial institutions are offering such rates," a source said.

Six public sector banks--Vijaya Bank, Canara Bank, Punjab National Bank (PNB) Central Bank of India, Bank of India, Syndicate and Indian Overseas Bank (IOB)--and the private-sector Federal Bank and ICICI Bank, have already raised over Rs 2,000 crore worth of subordinated debt since December. The rush to raise the tier-II capital through flotation of subordinated debt issues is prompted by the Reserve Bank's decision to raise bank's capital adequacy ratio from eight per cent to nine per cent by March 1999 and eventually to 10 per cent by March 2000.

Vijaya Bank kicked off the subordinated debt issues by public sector banks on December 28 when it entered the debt market with a 14.20 per cent paper. It mopped up Rs 120 crore through a 63-month paper.

"The banking industry will end up raising close to Rs 2000 crore from the market in the current fiscal. The point to note is 90 per cent of the subscription will come from the industry itself. Faced with tardy credit offtake, banks are lapping up debt issues of other banks," a merchant banker said.