Public sector banks which hoped to tap the debt market for Tier I capital before Basel III kicked in seem to be dropping their plans. Indian Overseas Bank (IOB) and Corporation Bank have both scrapped their perpetual bond issues worth R800 crore and R200 crore respectively, due to tepid response and some administrative mix-ups.
Some state-owned lenders had lined up to raise Tier I capital by way of perpetual bonds in December, since Basel III guidelines which become effective on January 1, do not allow this. However, not all banks had a good run. While IDBI Bank and Union Bank of India saw successful perpetual bond issues in December, United Bank of India was not as lucky.
According to issue arrangers, IDBI Bank’s perpetual bond issue of R450 crore at a coupon rate of 9.4% got fully subscribed by investors, earlier this month. However, United Bank of India’s issue of R300 crore was not subscribed owing to a lower coupon of 9.27%.
Union Bank of India on the other hand, came out with a perpetual bond issue worth R300 crore at a coupon rate of 9.29% successfully this week.
As per Basel III guidelines, debt capital cannot form part of the Tier I capital for banks. This would mean that banks will have to then depend on equity capital for Tier I, which is more expensive.
Typically provident funds (PFs) and insurance companies are buyers of such bonds. IOB, which had announced its R800 crore perpetual bond issue in November had decided to scrap the issue owing to market conditions, a senior official at the bank said. ?The merchant bankers had advised against going for such an issue because the market wasn’t ready for it, so we ultimately did not go for it,? the official said.
Corporation Bank, which announced a Tier I perpetual bond issue on Thursday, had other hurdles to face.
?In view of certain unforeseen developments with regard to consideration of this bond issue under Basel-II or III, the issue of the unsecured innovative perpetual non-convertible Tier-I bonds in the nature of promissory notes for R200 crore on private placement basis, stands withdrawn with immediate effect,? Corporation Bank said in a notification to the stock exchanges on Friday.
Due to some communication errors, the rating agencies had rated the instruments under Basel II, as against the state-owned bank’s requirement under Basel III.
?Afterwards they (rating agencies) asked for more time, but unfortunately December 31 is very close by, after which, funds raised through perpetual bonds will not be considered under Tier I capital as per Basel III requirement,? said AL Daulatani, executive director, Corporation Bank.