More banks are expected to issue infrastructure bonds in a bid to raise funds and plug the gap between loans and deposits, say experts.
“The opportunities of funding the infrastructure sector have increased by leaps and bounds with the announcement of the National Infrastructure Pipeline and National Monetisation Plan, which are under implementation,” Jyoti Prakash Gadia, managing director, Resurgent India, said. “The infrastructure bonds issued by banks provide them funds at competitive costs which they can specifically utilise for long-term infrastructure projects. Going forward, more banks are expected avail of this route to mobilise resources for infrastructure funding.”
To put things in perspective, banks have so far raised a total of Rs 19,600 crore in FY23 by issuing infrastructure bonds, data from ICRA showed. As the deposit growth of banks has struggled to keep pace with credit growth, marquee banks like State Bank of India (SBI), Bank of Baroda and ICICI Bank have raised sizeable funds by issuing infrastructure bonds. Broadly, ICRA expects total infrastructure bond issuances to surpass the all-time high of Rs 27,200 crore by March 31.
“The coupon rate for these bonds is very competitive. In terms of long-term money, this comes cheaper than where tier-2 bonds for banks are priced. The tenure of these bonds normally ranges anywhere between seven and 10 years. So, for 10 years if you are able to raise money at very competitive rates, it makes sense for you to do that,” Karan Gupta, director – financial institutions, India Ratings and Research, said. “If you were to go out and get more term deposits, then the re-pricing risk becomes a problem. Here you borrow Rs 10,000 crore at a certain coupon rate. That is it.”
Earlier this year, SBI announced that its board had approved raising of Rs 10,000 crore in 2022-23 through the issuance of infrastructure bonds. In December, the bank raised Rs 10,000 crore through infrastructure bonds maturing in 10 years at a coupon rate of 7.51%.
ICICI Bank raised Rs 5,000 crore through infrastructure bonds to fund projects in sectors like power and road. The coupon on the seven-year paper was set at 7.63%, still higher than the government benchmark bonds of comparable maturity.
While coupon rates on bonds vary with the movement of government security yields, additional tier-1 (AT-1) bonds from ‘AAA’ rated issuers have been issued at a coupon rate of around 7.75%, with a tier-2 issuance being a tad lower, say experts.
“Taking cue from the past, infrastructure bond issuances have typically picked up as liquidity conditions have tightened. Given the strong credit growth in relation to deposit accretion, infrastructure bonds have been one of the avenues (including drawdown of on balance sheet liquidity and refinance from AIFIs) for banks to bridge the credit and deposit growth gap,” says Aashay Choksey, vice president and sector head – financial sector ratings, ICRA. “Also, infrastructure bonds do not attract cash reserve ratio or statutory liquidity ratio requirements, resulting in higher net lendable resources and are also liquidity coverage ratio/ net stable fund ratio accretive, as these are longer-tenure instruments. These factors collectively are likely to have encouraged higher issuances by banks.”
Broadly, the end-use of infrastructure bonds is specific such as for investing in the infrastructure sector or investment in the affordable housing sector. They are less risky than AT-1 bonds and tier-2 bonds.
Given the longer tenure, investors in these bonds mainly include pension funds and insurance companies. Mutual funds have also invested in these bonds although their share is comparatively smaller.
By investing in infrastructure bonds, subscribers enjoy a steady income over a long period of time. It is also noteworthy that these instruments are being issued by bellwethers like SBI, Bank of Baroda and ICICI Bank, which provides a comfort to investors while parking money, say experts.
“You can draw a parallel with AT-1 bonds. Not everyone in the market can issue an AT-1 bonds. Because it is inherently risky, you do not find takers for everyone’s AT-1 bond. As I discussed, issuers themselves are of best quality and therefore their paper gets subscribed easily and they can command yields on that,” Gupta said.