Banks to hit bond street to meet credit demand.

MUMBAI: Expectations that loan demand will pick up and fears that interest rates will rise sooner than later is leading a spate of banks to hit the bond street. In the past month, close to 12 banks have raised close to Rs 3,500 crore through sale of perpetual bonds and other debt capital to help prepare for a possible loan offtake in the coming days.

Punjab National Bank, IDBI Bank and Allahabad Bank are some of the banks that are now expected to sell their bonds in the local market, merchant bankers said. This development comes as ICICI Bank is set to become the second Indian bank after SBI, to raise funds by selling its bonds in the international market. It plans to raise $ 750 million through dollar funds to shore up its capital base.

“The authorities have been sending out signals that they will not withdraw the economic stimulus immediately,” said Ajay Manglunia, head of corporate desk at Edelweiss Securities. “This has brought down the yields for corporate debt and banks want to make the best of the opportunity by selling their debt,” he added.

Corporate bond yields have eased to fresh three-and-a-half-month lows, tracking falling government bond yields. The yield on the Reuters benchmark five-year corporate bond ended at 8.07% on Friday, the lowest since July 30. Banks primarily raise funds for shoring up the capital in the in their balance sheet, something they burn up as they lend to consumers and the industry.

This is mostly done by selling bonds called Tier II issuances in industry parlance. Tier I capital consists of selling fresh shares (equity) and perpetual bonds, which are like quasi-equity offerings. Merchant bankers say highest quality banks can currently sell their Tier II bonds at around 8.5%, while their perpetual bonds at around 9.5%.

Export Import Bank of India, IDBI Bank and Bank of Baroda were some of the banks that raised funds at these rates in the past month. That the sentiment for bank offerings is also good can also be gauged from the fact that ICICI Bank’s $ 750 million issue already has an order book of $ 4 billion, merchant bankers said.

RBI recently revised downwards its credit growth target to 18% from 20% earlier. However rise in credit offtake has been slow. Loans disbursed by banks rose by Rs 17,047 crore during the fortnight between October 23 and November 6, according to the latest figures released by the RBI.