Why Banks Are Raising Tier II Bonds: Surge in Long-Term Capital Issuance

Tier II Bonds Latest News

• Banks are rapidly issuing Tier II bonds to strengthen their capital base at a time when companies are raising record amounts through IPOs. 
• The banking system is expected to raise about ₹25,000 crore this financial year, with ₹10,000 crore already raised.
• The surge is fuelled by three key factors:
  • High demand for long-term debt instruments,
  • Expectations of a repo rate cut in the upcoming monetary policy, which would make current borrowing costs attractive, and
  • Regulatory requirements pushing institutions to invest in such bonds.
• Together, these conditions have created a favourable window for banks to tap the market aggressively.

What Tier II Bonds Are and Why Banks Use Them

• Tier II bonds are long-term debt instruments that banks issue to strengthen their capital base. 
• With a minimum tenure of five years, they help banks meet Basel III capital adequacy norms and create an additional buffer to support future credit expansion.
• These bonds allow banks to raise low-cost, long-term capital without diluting equity, making them an efficient funding tool. 
• Experts note that Tier II instruments also improve a bank’s capital-to-risk weighted assets ratio (CRAR) by adding extra stability to its balance sheet.
  • CRAR is a key financial metric that measures a bank’s capital against its risk-weighted assets to assess its financial strength. 
  • It is calculated by dividing a bank’s capital (Tier 1 and Tier 2) by its risk-weighted assets and is expressed as a percentage. 
  • A higher CRAR indicates a bank is more capable of absorbing potential losses, which promotes financial stability and protects depositors. 

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Banks Step Up Tier II Bond Issuances Amid Favorable Market Conditions

• India’s top banks are accelerating Tier II bond issuances. 
  • SBI recently raised ₹7,500 crore at a competitive 6.93% via 10-year bonds, while ICICI Bank raised ₹1,000 crore in June. 
  • Experts estimate that banks may collectively raise up to ₹15,000 crore by December.
• Many lenders waited earlier due to ample liquidity, lower deposit rates, and expectations of future rate cuts, which would reduce borrowing costs. Last year, banks had raised nearly ₹31,000 crore through Tier II bonds.
• This renewed surge reflects improving market appetite and banks’ need to strengthen their capital base.

Why Banks Are Turning to Tier II Bonds

• Banks are issuing more Tier II bonds because current market conditions make long-term borrowing cheaper than raising funds through deposits. 
• With corporate issuers favouring shorter-term bonds this year, there is strong demand for long-duration, high-quality debt, creating a favourable window for banks.

Market Factors Driving the Surge

• Expectation of a repo rate cut in December is encouraging investors to lock in long-term yields now.
• Scarcity of top-rated long-tenor bonds has boosted appetite for Tier II issuances.
• SBI’s aggressively priced 6.93% bond has acted as a benchmark, increasing confidence among other banks.
• Provident and pension funds must meet regulatory investment quotas, pushing demand for long-term corporate bonds.

Regulatory and Strategic Considerations

• Some banks also need to refinance older bonds whose call options were exercised. 
• With stable markets and attractive yields, banks see this as the right time to strengthen capital buffers rather than wait for uncertain conditions later in the year.

Tier II Bonds Are Not the Primary Funding Source

• Experts note that Indian banks still rely mainly on deposits for growth and capital needs. 
• Most large banks have adequate internal capital generation and sufficient buffers, so future Tier II issuances will depend on how attractive market conditions remain.

Source: IE | BFSI