India to face key test for risky bank bond as Sebi lowers investment cap

India is set to face its first test of demand for a riskier type of bank bond since the regulator introduced a cap on mutual funds’ investments in such securities.

One of the nation’s largest regional lenders, Bank of Maharashtra, is seeking bids Monday for rupee-denominated Tier 2 notes in a sale that will be closely watched to gauge demand from mutual funds, the biggest buyer of such debt.

The Securities & Exchange Board of India this month announced rules which restrict mutual funds’ holdings of perpetual Additional Tier 1 and Tier 2 notes to 5% of net assets for a single issuer, effective April 1. The regulator also asked asset managers to start valuing AT1 notes as 100-year securities, sparking a selloff in that debt. That valuation measure may be eased, people familiar with the matter said last week.

Concern has been rising about riskier bank bonds, which can be written down in a crisis. Lenders in India are saddled with one of the world’s worst bad debt piles and need to boost capital buffers in anticipation of more soured loans as the coronavirus batters businesses.