Banks eyeing fundraise via Tier-2 bonds: Here's why, Pg15

Key Highlights:

• Banks are actively raising funds via Tier-2 bonds to strengthen their capital base.
• The banking system anticipates raising approximately Rs 25,000 crore through Tier-2 bonds in the current fiscal year.
• State Bank of India (SBI) recently raised Rs 7,500 crore through Basel III-compliant Tier-2 bonds at a rate of 6.93%.
• Market expectations of a repo rate cut by the Reserve Bank of India (RBI) in December are driving demand for long-duration papers.

Detailed Insights:

• Tier-2 bonds help banks improve their Capital Adequacy Ratios (CAR) under Basel III norms, offering a buffer for future credit growth.
• Issuance of Tier-2 bonds allows banks to raise long-term capital efficiently without diluting equity.
• Banks are refinancing earlier bonds where call options have been exercised, contributing to the rise in Tier-2 bond issuances.
• Provident and pension funds are expected to increase investments to meet regulatory quotas, further incentivizing banks to raise capital through Tier-2 bonds.
• Corporate issuers have shown preference for short-tenor bonds this fiscal year, creating a gap and demand for long-duration papers like Tier-2 bonds.

Key Concepts Involved:

• Tier-2 Bonds: Debt instruments used by banks to increase their capital base and support business operations.
• Basel III Norms: International regulatory framework for banks to strengthen capital requirements and risk management.
• Capital Adequacy Ratio (CAR): Ratio of a bank's capital to its risk-weighted assets, ensuring banks can absorb losses.