SBI's infra bonds: Should retail investors opt for such investments?

State Bank of India (SBI) has raised  Rs 10,000 crore at a coupon rate of 7.54% through its third infrastructure bond issuance. The bidding was held on Monday.  The yield was lower than the 7.7 per cent for infrastructure bonds issued by the bank in January.

The number of bids received was 115, indicating wide participation. The investors were provident funds, pension funds, insurance companies, mutual funds, companies, etc.

What are infra bonds?

Infrastructure bonds are financial instruments that are strategically issued by governments or private companies to secure funds that are solely dedicated to advancing various infrastructure development projects.

From building key roadways, bridges, and airports to generating plants, railways, and telecommunications networks, these bonds play an important role in supporting economic growth, improving quality of life, and addressing a nation's or region's infrastructure deficit.

In the space of infrastructure bonds, two distinct types emerge, each playing a pivotal role in fueling progress.

First is Government-issued Infrastructure Bonds, these sovereign offers, organized by the government or one of its trusted agencies, paving the way for national or regional infrastructure projects. The foundation of trust is their low-risk nature, which is anchored by the governing authority's unwavering creditworthiness, and the other, Corporate Infrastructure Bonds, which are issued by private firms, particularly those devoted to infrastructure development, take center stage. These financial instruments have a slightly higher risk, but they entice investors with the promise of high profits.

Why does the credit rating matter?
"Infrastructure bonds are often issued for a period of 10 to 15 years or more. The credit rating bestowed upon infrastructure bonds serves as a compass, guiding investors through the seas of financial security and default possibilities. Government-issued bonds reign supreme with elevated credit ratings, rendering them a fortress of safety in comparison to their corporate counterparts. These bonds come with a 10-year term and a 5-year lock-in period. In case a secondary market is not easily accessible, one can benefit from the investment for the entire 10-year duration. Some issuers may even offer a guaranteed buyback option," said Abhijit Roy, CEO, GoldenPi.

India Ratings  has assigned State Bank of India’s Infrastructure Bonds, ‘IND AAA’/Stable rating. Also, the rating agency affirmed the existing ratings.

The long-term issuer rating has been affirmed at IND AAA with Stable outlook.

According to the rating rationale report, the ratings continue to reflect SBI’s strong franchise with a dominant market share in the Indian banking system, making it high in systemic importance.

The rating of the infrastructure bonds is equated to the bank’s Long-Term Issuer Rating. The rating of AT1 bonds reflects the bank’s ability to service coupons and manage principal write-down risk on its debt capital instruments, the agency said.

Are such bonds a worthy investment?

 Bonds are an attractive investment option for investors seeking a steady stream of income. In India, banks have been issuing bonds to meet their capital requirements. They offer a fixed rate of coupon which is agreed upon at the time of issuance.
 This coupon rate is relatively high and remains the same throughout the tenure of the bond. Once the tenure is complete, investors receive the principal amount along with the final coupon payment. These bonds are rated by credit rating agencies which indicated the creditworthiness of the issuing bank.

It helps investors assess the risk involved in investing and they can decide accordingly. A AAA-rated bank issuance is considered very safe and often recommended for both short-term and long-term investors.
  

Benefits of investment: 

• They offer a fixed rate of interest, 

• Investors get a predictable income stream.

• A AAA-rated bank is very safe so your investment is also safe.

• They can be used to save tax, as the interest income is exempt from income tax up to a certain limit.

Can you save tax by investing in infra bonds? 

Earlier taxpayers could claim income tax deduction for investment of up to Rs 20,000 in long-term infrastructure bonds under Section 80CCF of the Income Tax Act. But this was offered only for an interim period and has now been stopped.

As most of these bonds are highly rated long-term bonds, they are low-risk investment options, so retired investors or those closer to retirement can opt for them

"As far as taxation is concerned, these bonds will pay out yearly coupons which will be taxed at the maximum marginal rate. The bonds will attract a 10% long term capital gains if one sells it before maturity and after a holding period of 12 months," said  Gaurav Damani, Head of Fixed Income, Sanctum Wealth.
 

Should a retail investor bet on it? 

"At 7.54% per annum coupon rate, the SBI Infrastructure bond is not very attractive for retail investors, since many banks are offering similar interest rates on their 5-7 years long fixed deposits, along with deposit insurance of up to Rs 5 lakh.

Bonds are less liquid than fixed deposits, which can be liquidated anytime by paying a small penalty. Thus, the 15 years tenure of the bond is a major liquidity challenge for retail investors. The investors should also bear in mind that the interest income on bonds is taxed at slab rates," said  Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth.

"The success of SBI Bonds indicates that there is strong demand for infrastructure bonds in India and other banks might tap the market as well. The bonds were issued at a coupon rate of 7.54%, which appears to be a decent offering to investors who are seeking steady and fixed income in the long run. If you are considering investing in infrastructure bonds, you may opt for tax-free bonds where you get tax benefits along with fixed income. However, it is crucial to check credit rating, tenure, coupon rate and tax benefits whenever you are investing in bonds," said Adhil Shetty, CEO of BankBazaar.

"The yield offered on these bonds was only 13 basis points higher than government securities of similar maturity. Typically, historically such bonds have offered higher spreads (difference in yield relative to government securities). As far as an investment in these bonds are concerned, from an HNI perspective, the yield isn’t attractive as highly rated debt instruments (AAA) are available in the 7.75-8% category for a slightly less tenor of 8-10 years. SBI last month issued perpetual bonds with a call date of 10 years @ 8.10% which is more likely to generate interest among high net worth individuals," said  Gaurav Damani, Head of Fixed Income, Sanctum Wealth.

One can look to invest in these bonds only with a view that there could be yield compression over the next couple of years and since the tenor is 15 years, duration might come in handy and add to the overall gains.

Safety of investment
One of the major advantages of investing in SBI Infrastructure Bonds is the safety of the investment." These bonds are secured instruments, backed by the government of India. This means that investors are likely to get their principal investment back irrespective of the performance of the bond. This gives investors the peace of mind that their investment is safe and secure," said CA Sharad Kumar Sharma.

As these bonds are secured instruments and backed by the government of India, the risk of default is quite low. 

Who can participate?

Participation in infrastructure bond investments is open to all Indian citizens above 18 years of age, as well as Hindu Undivided Families (HUF), which encourages broader involvement in the nation's development and growth, said Roy.

The domestic bond market has raised around Rs 8.2 lakh crore in the last financial year, and it is expected to set a new record with Rs 9 lakh crore raised in the current financial year.