Long-term capital turns costlier

Raising longer-term capital funds is becoming costlier for banks. The mark-up on the interest if banks do not select call option on bond issues after 10 years has doubled to 100 basis points.

UTI Bank and ICICI Bank are tapping the market with bonds that would qualify for upper tier II, where the mark-up has increased, against 50 basis points offered in the fourth quarter of 2006.

"Long-term funds are becoming more expensive. There are few investors at the longer end of the market, especially in the private category. There is nobody other than provident funds (PFs), which again have an investment ceiling of 10 per cent in these (unapproved) securities," said a UTI Bank official.

UTI Bank plans to raise at least Rs 100 crore through the issue of upper tier II unsecured redeemable subordinated bonds with a maturity period of 15 years, carrying a coupon rate of 9.5 per cent per annum.

At the end of 10 years, the bonds would carry a 100 basis points step-up in coupon to 10.5 per cent, if the bank does not redeem the bonds.

According to Partha Mukherjee, head - treasury, UTI Bank, "This (higher mark-up on coupon) has been done by and large to keep up with the market."

In November 2006, the bank issued unsecured redeemable subordinated bonds for Rs 200 crore, with a maturity period of 15 years, carrying a coupon rate of 9.35 per cent and a step-up in coupon of 50 basis points to 9.85 per cent after the tenth year, if the call option is not exercised.

ICICI Bank, the country's second largest bank, is also offering a step-up in coupon payment of 100 basis points after the tenth year on its 15-year upper tier II bond issue. The bonds carry a coupon rate of 9.4 per cent and beyond ten years 10.4 per cent.

Private sector Yes Bank too is offering a 50 basis points mark-up in coupon on its upper tier II issue with a tenor of 15 years, but the bonds carry a higher coupon rate of 9.6 per cent for the first ten years.

"In the last couple of months, long-term funds have become marginally costlier," said Rajat Monga, chief financial officer at Yes Bank. Two months back, the bank had also issued lower tier II bonds with a tenure of 9.5 years carrying an annualised coupon rate of 9.1 per cent.

Banks have raised about Rs 20,000 crore through perpetual, upper tier II and lower tier II bond issues since March 2006 to meet capital adequacy requirements with the fast expanding loan portfolios. Bank credit has been growing at an unprecedented 30 per cent for the third successive year.

"Considering that the previous issue was a notch lower, a premium of up to 40 basis points is understood. Even then there has been a hardening of up to 20 basis points in the longer term yields over the period," said Monga.

While, the bond yields have followed the movement in the underlying government bond yields which have moved by 30 basis points, said Monga, the movement has pre-dominantly been because of demand and supply.

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IT'S HURTING

Mark-up on interest rates, if banks do not redeem bond issues after 10 years, has doubled to 100 bps

UTI Bank and ICICI Bank have lined up upper tier-II bond floats

There are no investors for this segment apart from PFs which have 10% ceiling on investment in such securities