Bank of Baroda raises Rs 5,000 crore via 10-year infra bonds at 7.3%

Coupon rate lower than what SBI offered in recent fundraise

State-owned Bank of Baroda (BoB) on Monday raised Rs 5,000 crore through 10-year infrastructure bonds at a coupon rate of 7.3 per cent, according to sources aware of the development.

The bond offering, rated AAA by CRISIL Ratings, had a base issue size of Rs 2,000 crore and a greenshoe option of Rs 3,000 crore and was fully subscribed.

A dealer at a state-owned bank said that the yields on 10-year government securities have fallen, resulting in a lower cut-off rate for BoB compared to the country's largest lender State Bank of India (SBI). Usually, SBI is treated like a barometer for the Indian economy and has to pay the lowest coupon rate.

The BoB issue saw strong demand, which is typical for such instruments as pension funds prefer to invest in long-term bonds.

The dealer added that cut-off rates for future infrastructure bond issues were expected to be in the range of 7.3 per cent to 7.35 per cent for state-owned banks, and 7.35 per cent to 7.4 per cent for private banks.

Funds raised through infrastructure bonds are attractive from a bank’s point of view since they are exempt from regulatory reserve requirements such as the statutory liquidity ratio (SLR) and cash reserve ratio (CRR). Unlike funds mopped up through deposits, for which banks must maintain 4.5 per cent of the amount as CRR with the Reserve Bank of India (RBI) and invest approximately 18 per cent in securities to meet SLR obligations, infrastructure bond proceeds can be fully deployed in lending activities.

Banks, especially state-owned banks, have made a beeline to raise funds through infrastructure bonds recently. SBI raised Rs 20,000 crore in two tranches through 15-year infrastructure bonds at 7.36 per cent. The first tranche of Rs 10,000 crore was raised in June, with another tranche following in July.

Canara Bank raised Rs 10,000 crore through 10-year infrastructure bonds at 7.4 per cent while Bank of India raised Rs 5,000 crore through 10-year instruments at 7.54 per cent.

Meanwhile, Bank of Maharashtra raised Rs 811 crore through a 10-year infrastructure bond issue at a coupon rate of 7.8 per cent earlier this month. The issue had a base size of Rs 500 crore and a greenshoe option of Rs 2,500 crore.

Cumulatively, state-owned banks have raised Rs 35,811 crore in the last couple of months through infrastructure bonds.
 

Infrastructure bonds have a tenor of at least seven years and the proceeds are utilised by banks to fund long-term infrastructure projects.