PSBs Lead Infra Bond Issuances, Driving Record High In FY25: Icra

Bond issuances by Indian banks are set to reach an all-time high of Rs 1.2 to 1.3 trillion in FY25, driven primarily by infrastructure bond issuances from public sector banks (PSBs), according to a report released by ICRA. This expected figure surpasses the previous high of Rs 1.1 trillion in FY2023 and reflects a significant surge in funding activity amidst tight liquidity conditions.

ICRA's analysis shows that the PSBs will dominate bond issuances, accounting for an estimated 82 to 85 per cent of the total in FY25, primarily through infrastructure bonds. As of FY25 year-to-date (YTD), banks have already issued bonds worth Rs 767 billion, registering a remarkable 225 per cent year-on-year growth and achieving 75 per cent of the total issuances seen in FY2024.

PSBs have emerged as dominant players in infrastructure bond issuances due to improved capital positions, tight funding conditions, and a sizeable infrastructure loan book. Between FY23 and FY25 YTD, PSBs accounted for 77 per cent of all infrastructure bond issuances. This trend is expected to continue, with infrastructure bonds anticipated to represent more than two-thirds of all bank bond issuances in FY25.

In previous years, banks primarily issued Tier-1 and Tier-2 instruments to boost capitalisation metrics amidst low profitability and asset quality challenges. However, the focus has now shifted towards infrastructure bonds, with PSBs leveraging a stable and granular depositor base to provide long-term funding for infrastructure projects. As of 30 June 2024, banking sector advances to the infrastructure sector stood at Rs 13 to 14 trillion, with PSBs commanding a 75 per cent share.

Private Banks' Cautious Approach
While private sector banks have focused on reducing their credit-to-deposit (CD) ratio, they have largely refrained from bond funding due to concerns about further worsening their CD ratio. In contrast, PSBs have ample room to pursue growth through infrastructure bonds, supported by strong demand from insurance companies and provident funds.

"During FY15 to FY22, PSBs had a negligible share in infrastructure bond issuances. However, with improved capital positions and a sizeable  infrastructure loan book, PSBs have become dominant in the issuance of infrastructure bonds, a trend likely to persist through FY2025," stated Sachin Sachdeva, Vice President and Sector Head – Financial Sector Ratings, Icra.

Its analysis of 13 large banks revealed that as of 31 August 2024, these banks had infrastructure bonds outstanding at approximately Rs 2.2 trillion against an infrastructure loan book of around Rs 11 trillion as of 30 June 2024. Notably, 11 of these banks have an outstanding infrastructure bond proportion of less than 40 per cent of their infrastructure loan book, indicating substantial capacity to raise more funds through these instruments.

Infrastructure bonds have been issued with longer tenors of 10 to 15 years, catering to investor preferences and providing stable funding for infrastructure growth. Furthermore, funds raised via infrastructure bonds are exempt from statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements, making them an attractive option despite slightly higher costs compared to traditional deposits.

This surge in bond issuances reflects banks' strategies to address tight liquidity conditions, with PSBs taking the lead in supporting infrastructure sector growth. As the fiscal year progresses, bond issuances are expected to play a crucial role in meeting the funding requirements for large-scale infrastructure projects across India.