Loans to cost more as bank raising funds at high rates

- PNB, IOB and DCB Bank seek to sell bonds amid a global turmoil

- These banks may have to negotiate higher funding costs

- Swiss regulator writes down $17 bn of AT-1 and Tier-II instruments

- PNB’s AT-1 bonds open for bidding on March 24

- It’s seeking to raise a base issue of Rs500 cr and a Green Shoe issue of Rs1,500

Mumbai: Quite a few Indian banks are going ahead with their plans to raise funds at the fag-end of the current financial year even though the crisis at Swiss financial major Credit Suisse has created turmoil in the global markets. But it is more likely that these Indian banks will end up paying higher coupon rates.

The reason behind it is that Indian market is different from the global market. Secondly, the lenders will simply pass on the increased coupon rates to their borrowers, making the lending rates further costlier.

Punjab National Bank (PNB), Indian Overseas Bank (IOB) and DCB Bank may have to negotiate higher funding costs as these lenders seek to sell bonds amid a global turmoil caused by the Swiss regulator’s write-down of nearly $17 billion of additional tier-1 (AT-1) and Tier-II instruments in the wake of Credit Suisse bailout.

PNB’s AT-1 bonds open for bidding on March 24. The public-sector lender is seeking to raise a base issue of Rs500 crore and a Green Shoe issue of Rs1,500, with the final price to be determined during the bidding process.

India Ratings has assigned an AA+ rating to the AT-1, or perpetual bond issue. Even though PNB has already raised Rs550 crore at a coupon rate of 8.40 per cent through a similar route some time back, IOB and DCB are the new entrants into the market.

The only difference being that IOB and DCB are raising fund under Tier-II capital. While IOB will be raising fund to the tune of Rs1,000 crore, DCB plans to raise Rs300 crore under the instrument.

Talking to Bizz Buzz, Ajay Manglunia, Managing Director, JM Financial, says: “Apart from global turmoil, things like high credit offtake and dried up market due to already raising of funds by other entities like NBFCs and HFCs may also lead to the coupon rates going up.”

While credit offtake has gone as high as 15-18 per cent, fund raising by the country’s financial institutions has reached Rs60,000-70,000 crore in the month of March alone, he said.

So was the case with short-term rates which have resulted in average cost of fund also going high, he added.

Coming to interest rates, which had been hovering around seven per cent before March, they have also gone up to 7.5 per cent as on date. These are likely to go up further now.

As regards RBI, whose MPC is slated to meet next month to take a call on interest rate, the apex bank may take a cue from the Fed rate’s recent hike of interest rate by 25 basis points and go for another rate hike, pushing interest rates further. However, the central government has been sending signals to RBI not to go for further rate hikes. It is worth mentioning here that the Reserve Bank of India (RBI) has already raised key policy rates by 250 basis points in the current fiscal so far.

Apart from global turmoil, things like high credit offtake and dried up market due to already raising of funds by other entities like NBFCs and HFCs may also contribute in the coupon rates going up

- Ajay Manglunia, MD, JM Financial, tells Bizz Buzz