Indian Banks Poised for Record Bond Issuances, Driven by Public Sector Lenders

India's banking sector is set to witness a surge in bond issuances, with public sector banks (PSBs) leading the charge. According to a recent report, Indian banks are expected to issue bonds worth a staggering Rs 1.2 lakh crore to Rs 1.3 lakh crore in the current fiscal year (FY25), surpassing the previous high of Rs 1.1 lakh crore in FY23.

Powering India's Infrastructure Growth

Dominance of Public Sector Banks

The report by leading credit rating agency ICRA reveals that PSBs are likely to command a significant share of these bond issuances, accounting for 82-85% of the total. This surge in bond issuances is primarily driven by the infrastructure sector, with infrastructure bonds dominating the segment.

The report highlights a notable shift in the landscape, as PSBs have increased their presence in the infrastructure bond market. During the period from FY15 to FY22, PSBs had a negligible share in infrastructure bond issuances. However, with improved capital positions, tight funding conditions, and a sizeable infrastructure loan book, PSBs have now become the dominant players, accounting for 77% of banks' infrastructure bond issuances in FY23-FY25 (year-to-date).

This trend is expected to continue through FY2025, with PSBs likely to account for 82-85% of the total bank bond issuances in the fiscal year. The report suggests that infrastructure bonds are expected to account for more than two-thirds of these issuances, reflecting the growing importance of the infrastructure sector in the country's economic development.

Driving Infrastructure Financing

The surge in bond issuances by Indian banks, particularly PSBs, is closely linked to the government's continued focus on infrastructure spending. The availability of a sizeable infrastructure loan book, which is eligible to be funded through these infrastructure bonds, has further fueled the demand.

According to the report, banking sector advances to the infrastructure sector are estimated to be in the range of Rs 13 lakh crore to Rs 14 lakh crore as of June 30, with PSBs holding a dominant share of around 75%. This underscores the critical role that banks, especially PSBs, play in financing India's infrastructure growth.

The report also highlights the strong demand from insurance companies and provident funds for long-term issuances, which supports the banks' ability to raise funds through these infrastructure bonds. While the regulations require a minimum tenor of 7 years, the investor preference has led to the issuance of bonds with even longer tenors of 10 and 15 years.

Addressing Liquidity Challenges

The surge in bond issuances by Indian banks is also a response to the tight liquidity conditions and the continuous gap between credit growth and deposit growth. This has necessitated banks to explore alternative sources of funding, such as bonds, to meet their financing needs.

The report notes that while the share of borrowings in total liabilities remains below the pre-Covid levels, banks have recently increased their fund-raising activities through bonds. This strategic move aims to address the liquidity challenges and ensure that the banking sector can continue to support the growing credit demand in the economy.

The report's findings underscore the pivotal role that the Indian banking sector, particularly the public sector banks, is playing in fueling the country's infrastructure development and economic growth. As the demand for infrastructure financing continues to rise, the banks' ability to raise long-term funds through bond issuances will be crucial in meeting this growing need and driving India's progress.