Indian Banks to Issue Record Bonds in FY2025, Led by Public Sector Banks
New Delhi, India – Banks in India are set to issue a record amount of bonds in the financial year 2025, with estimates reaching Rs 1.2-1.3 trillion. This surpasses the previous peak of Rs 1.1 trillion in FY2023, according to a report by ICRA.
Public Sector Banks Leading the Way
Public sector banks (PSBs) are expected to dominate the bond issuances, commanding 82-85% of the total, mainly through infrastructure bonds. This surge is driven by the need for alternative funding sources as deposit growth lags behind credit expansion.
Current Bond Issuances
As of FY2025 year-to-date, banks have issued Rs. 767 billion in bonds, a 225% increase from the previous year, already accounting for 75% of the total bond issuances in FY2024.
Government Push for Infrastructure
The dominance of PSBs is attributed to their large infrastructure loan portfolios and the government’s push for infrastructure development. Sachin Sachdeva, Vice President & Sector Head – Financial Sector Ratings at ICRA, noted that PSBs had a negligible share in infrastructure bond issuances from FY2015 to FY2022. However, with improved capital positions and a sizeable infrastructure loan book, PSBs accounted for 77% of infrastructure bond issuances in FY2023-FY2025 (YTD).
Long-Term Funding
Long-term funding for infrastructure projects is supported by strong demand from insurance companies and provident funds. These bonds, typically issued for tenors of seven years or longer, meet the demand for long-term investments from institutional investors.
Shift from Traditional Bonds
Traditionally, banks issued Tier 1 and Tier 2 capital instruments to improve capitalisation. However, since FY2023, infrastructure bonds have gained traction as profitability improved, reducing the need for capital-raising through traditional routes.
PSBs’ Advantage
PSBs benefit from a stable depositor base, allowing them to focus on long-term funding for infrastructure projects. The banking sector’s total advances to the infrastructure sector are estimated at Rs. 13-14 trillion as of June 2024, with PSBs accounting for approximately 75% of this figure.
ICRA’s Analysis
ICRA’s analysis of 13 large banks revealed that the outstanding infrastructure bonds amount to Rs. 2.2 trillion as of August 2024, against an infrastructure loan book of Rs. 11 trillion as of June 2024. Sachdeva added that 11 of these banks have their infrastructure bonds outstanding at less than 40% of their infrastructure book, leaving room for more bond issuances.
Efficient Capital Source
Funds raised through infrastructure bonds are not subject to statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements, making them a more efficient source of capital. However, these funds come at a slightly higher cost compared to deposits.
Private Sector Banks’ Strategy
Private sector banks (PVBs) are expected to limit their bond issuances as they focus on managing their credit-to-deposit (CD) ratios. High CD ratios could worsen if PVBs continue to raise funds through bonds.
Future Outlook
As the infrastructure sector remains a priority for the government and financial institutions, the trend of rising bond issuances by banks, particularly PSBs, is likely to continue. With Rs. 767 billion already raised in FY2025 YTD, banks are on track to surpass previous records and support India’s infrastructure development efforts.
Doubts Revealed
Bonds -: Bonds are like IOUs. When banks issue bonds, they are borrowing money from people or companies and promise to pay it back later with some extra money called interest.
FY2025 -: FY2025 stands for Fiscal Year 2025. A fiscal year is a one-year period that companies and governments use for financial reporting and budgeting. In India, it starts on April 1 and ends on March 31 of the next year.
Public Sector Banks (PSBs) -: Public Sector Banks are banks that are owned by the government. In India, examples include State Bank of India (SBI) and Punjab National Bank (PNB).
Rs 1.2-1.3 trillion -: Rs 1.2-1.3 trillion means 1.2 to 1.3 lakh crore rupees. A lakh is 100,000 and a crore is 10 million, so this is a very large amount of money.
Deposit growth -: Deposit growth means how much money people are putting into their bank accounts. If deposit growth is slow, it means people are not saving as much money in banks.
Credit expansion -: Credit expansion means banks are giving out more loans to people and businesses. This can be for things like buying a house, starting a business, or building infrastructure.
YTD -: YTD stands for Year To Date. It means the period from the beginning of the fiscal year until now.
Infrastructure loan portfolios -: Infrastructure loan portfolios are collections of loans that banks give out for building things like roads, bridges, and schools. These are usually big projects that need a lot of money.
Government support for infrastructure development -: Government support for infrastructure development means the government is helping to build things like roads, bridges, and schools. This can be through money, policies, or other resources.
