Bond Financing
Banks make a series of issuances to fund infrastructure growth
Indian commercial banks have been actively issuing bonds. Amid slow growth in deposits and rising credit demand, banks are now seeking alternative funding sources, with bonds emerging as a key financial instrument. In the infrastructure sector, banks have been actively issuing infrastructure bonds. The sector has seen significant participation from public sector banks (PSBs).
Banks turn to bonds
The deposit growth rate has been lagging behind credit growth for some time in the industry, due to which banks have turned to bonds to raise funds. In 2024-25, as of November 2024, banks have raised over Rs 792.36 billion through infrastructure bonds compared to Rs 510.81 billion raised in 2023-24. With a third of the financial year still remaining, infrastructure bond issuances have already recorded an impressive growth of approximately 55 per cent compared to the previous year, with further issuances expected.
Tight liquidity conditions have emerged in recent years, partially because depositors have been exploring alternative sources of investment, including mutual funds and equity markets, for higher returns. In the current environment where securing deposits poses a challenge, and given the availability of sizeable infrastructure loan books, raising funds through infrastructure bonds presents a more favourable solution.
While in other means of raising funds such as deposits, banking institutions are required to maintain a statutory liquidity ratio by investing approximately 18 per cent in securities and a cash reserve ratio of 4.5 per cent with the Reserve Bank of India (RBI), infrastructure bonds are exempted from these regulatory requirements.
This gives infrastructure bonds an advantage as the proceeds from the funds can be fully deployed in lending activities without maintaining reserves. However, on the downside, infrastructure bonds attract slightly higher interest payouts than funds raised via deposits. Nonetheless the long tenors associated with these bonds align well with the long gestation periods of infrastructure projects, thereby addressing the problem of asset-liability mismatches. As per regulations, the minimum tenor for infrastructure bonds is seven years. However, investor attraction and preference have led to bond issuances with longer tenors of 10-15 years in
recent months.
PSBs take the front seat
As of June 2024, commercial bank loans to the infrastructure sector have been estimated to be around Rs 13 trillion-Rs 14 trillion. Of this, PSBs account for the majority, providing approximately 75 per cent of the total funding. Given the high credit-to-deposit (CD) ratio for private banks, ICRA Limited expects them to reduce bond-based funding as it would worsen the CD ratio. However, with the availability of a more stable depositor base and greater capacity to fund infrastructure projects by providing long-term capital funding, PSBs often have a larger share in the infrastructure sector.
Between 2015 and 2022, PSBs held a relatively low share in infrastructure bond issuances. However, with healthier balance sheets and a substantial infrastructure loan portfolio, PSBs have since taken a leading role in driving infrastructure bond issuances.
PSBs accounted for 77 per cent of total infrastructure bond issuances by banks during April 2022-September 2024. This trend is expected to continue in 2024-25, with PSBs projected to account for an 82-85 per cent share in bond issuances, and infrastructure bonds likely to make up more than two-thirds of the total.
Recent bond issuances
Investors have shown strong interest in infrastructure bond issuances. The majority of these issuances have also utilised the green shoe option, indicating significant oversubscription. The average maturity of the bonds ranged from 10 to 15 years, with a coupon rate ranging between 7.4 and 7.7 per cent.
Multiple banks have made large issuances. In November 2024, State Bank of India raised Rs 100 billion in its third tranche of infrastructure bonds, bringing its total to Rs 300 billion for 2024-25. Similarly, Bank of India (BOI) raised Rs 50 billion in its second issue of the year, following a Rs 50 billion issuance in July 2024. Federal Bank also entered the market, raising Rs 15 billion through redeemable, unsecured long-term infrastructure bonds, marking the second such issuance by a private sector bank. Prior to this, Axis Bank raised Rs 39.25 billion in September 2024.
In October 2024, Indian Bank raised Rs 50 billion in a follow-up to its September issuance in which it had raised the same amount. Prior to this, Bank of Maharashtra secured Rs 8.11 billion, while Bank of Baroda raised Rs 50 billion, showcasing a strong appetite for infrastructure bond funding across the banking sector.
Further, Punjab and Sind Bank and BOI are reportedly planning to raise Rs 30 billion and Rs 50 billion through infrastructure bonds respectively.
ICRA has forecasted that banks’ bond issuance will reach an all-time high of Rs 1.2 trillion-Rs 1.3 trillion in 2024-25. The new high will surpass the previous high of Rs 1.1 trillion in 2022-23, and be 20-30 per cent higher than Rs 1 trillion in 2023-24.
Other financial institutions have also been actively participating in the bond market. REC Limited raised $500 million in October 2024 through green dollar bonds to fund various renewable energy projects and Rs 50 billion through zero coupon bonds. The National Bank for Financing Infrastructure and Development raised Rs 50 billion through bonds in July 2024. It is planning another issuance worth Rs 50 billion with a 20-year tenor, including a Rs 40 billion green shoe option.
The RBI has announced plans to issue Rs 200 billion in sovereign green bonds in four equal tranches during the second half of fiscal year 2024-25. These bonds aim to support projects related to climate change, clean transportation, renewable energy, and sustainable water and waste management.
Meanwhile, municipal corporations have been tapping this opportunity. In October 2024, the Greater Chennai Corporation raised Rs 2 billion through municipal bonds for infrastructure projects while the Rajkot Municipal Corporation raised Rs 1 billion. Further, the Pimpri Chinchwad Municipal Corporation in Pune is planning to raise Rs 2 billion through the issuance of green bonds.
Future potential
Looking ahead, the bond market holds significant potential to finance infrastructure projects across the country. Recognising the advantages of this avenue for financing infrastructure projects, banks have made record-high issuances in 2024. Moreover, in recent years, bond issuances by banks have seen a gradual uptake.
However, compared to the overall funding requirement for infrastructure development, the bond market is still, relatively, too small to meet a significant share of this demand. ICRA’s analysis of 13 banks, including large PSBs and private banks, revealed that they had about Rs 2.2 trillion in outstanding infrastructure bonds as of August 2024, compared to an infrastructure loan book of nearly Rs 11 trillion as of June 2024. This further indicates a massive untapped potential that can be explored through infrastructure bonds.
Nonetheless, investor confidence and the market’s appetite for additional issuances remain strong. The inclusion of Indian government bonds in JP Morgan’s Emerging Market Global Diversified Index in June 2024 is expected to further enhance overall confidence. As per industry experts, issuances are expected to cross Rs 1 trillion in 2024-25. If this pans out as expected, greater bond market activity can be expected on grounds of widespread confidence.