Banks May Raise ₹15,000 Crore Through Tier II Bonds

Context

Indian Banks (like SBI and ICICI) are increasingly raising money through Tier II Bonds (nearly ₹10,000 crore has already been raised and total issuances may reach ₹25,000 crore for the year 2025) due to strong demand for long-duration bonds, expectations of a repo rate cut in December 2025 and regulatory requirements pushing provident and pension funds to invest more in corporate bonds.

What are Tier II Bonds?

Tier II bonds are long-term debt instruments issued by banks to increase their Tier 2 capital under Basel III norms. They:

1. Have a minimum maturity of 5 years
2. Improve the bank’s Capital Adequacy Ratio (CAR)
3. Act as an additional cushion for future credit growth
4. Help raise long-term funds without diluting equity
5. Offer an efficient, relatively low-cost method for capital mobilisation.

What is Capital Adequacy Ratio (CAR)?

1. CAR is a measure of how much capital a bank has compared to how risky its loans and assets are.
2. Formula: CAR = (Tier 1 Capital + Tier 2 Capital) ÷ Risk-Weighted Assets
3. Higher CAR = safer bank.
4. Basel III norms require banks to maintain a minimum CAR to stay stable.

What is Tier 1 and Tier 2 Capital?

1. Tier 1 capital is the bank’s core capital, made up of money from shareholders (equity) and profits saved (reserves). It is the strongest cushion to absorb losses while the bank is operating and shows the bank’s financial strength.
2. Tier 2 capital is the bank’s supplementary capital, which includes Tier II bonds, loan‑loss reserves, and other backup funds. It acts as an extra buffer, mainly used if the bank faces bigger trouble or is winding up.
3. Key Difference: Tier 1 = core, permanent capital; Tier 2 = supplementary capital, used as an additional safety cushion.

How the Tier II Bond Trend is Unfolding?

1. Sharp Rise in Issuances
   1. SBI raised ₹7,500 crore through Basel III-compliant Tier II bonds.
   2. ICICI Bank raised ₹1,000 crore
   3. Banks may raise an additional ₹15,000 crore by December.
   4. Last year, banks raised ₹31,000 crore.
2. Why Banks Are Issuing More Tier II Bonds
   1. Market Factors:
      1. High demand for long-duration papers.
      2. Investors want to lock in yields before an expected 25 bps repo rate cut.

• Limited supply of top-rated long-term bonds.

1. Regulatory Factors: Provident/pension funds must invest in corporate bonds to meet mandated quotas.
2. Strategic Factors:
   1. Banks waited earlier due to high liquidity and lower deposit rates.
   2. Some banks need to refinance old Tier II bonds.

• SBI’s aggressive pricing created a benchmark for others.

3. Market Dynamics
   1. Corporate issuers are preferring short-term bonds, creating a gap in long-duration options.
   2. Stable markets and attractive yields make this a good time for banks to raise capital through bonds.
   3. Tier II bonds help banks build capital without relying on deposits, which already dominate their funding.

Challenges & Way Forward

Conclusion

Banks are raising more Tier II bonds due to strong demand, favourable market conditions and regulatory investment requirements. With expectations of a rate cut and limited supply of long-duration bonds, this is a strategic moment to strengthen capital buffers. Tier II bonds help banks meet Basel III norms, support credit growth and maintain financial stability without diluting equity.