Bank Bond Issuances Set for Record High in FY 2025

Bank Bond Issuances Set for Record High in FY 2025

Sub: Eco

Sec: Monetary Policy

• Expected Record Issuances:
  • Bond issuances by banks are projected to reach an all-time high of ₹1.2-1.3 lakh crore in FY2025, surpassing the previous record of ₹1.1 lakh crore in FY2023.
  • This surge is driven by tight liquidity conditions and credit growth outpacing deposit growth, requiring banks to raise funds from alternative sources.
• Issuances Year-to-Date (YTD):
  • As of FY2025 (YTD), total bond issuances by banks stand at ₹76,700 crore, marking a 225% year-on-year (YoY) growth.
  • This amount has already reached 75% of the total bond issuances of FY2024.
• Dominance of Public Sector Banks (PSBs):
  • Public sector banks are leading in bond issuance, as private banks focus on reducing their credit-to-deposit (CD) ratio.
  • PSBs accounted for 77% of infrastructure bond issuances between FY2023 and FY2025, with expectations to grow to 82-85% in FY2025.
• Infrastructure Bonds:
  • The government’s emphasis on infrastructure spending and banks’ sizeable infrastructure loan books have fueled the increase in infrastructure bonds.
  • Two-thirds of bank bond issuances in FY2025 are expected to be infrastructure bonds, supported by long-term demand from insurance companies and provident funds.
• Advantages of Infrastructure Bonds:
  • Bonds for infrastructure have longer tenors (10-15 years) as per investor preference.
  • Unlike traditional deposits, these bonds are not subject to SLR and CRR requirements, making them more flexible for funding long-term portfolios.
• Key Sectors Funded:
  • Affordable housing is also eligible for funding through infrastructure bonds, potentially expanding the eligible loan book for bond issuances.
  • As of June 30, 2024, PSBs held 75% of banking sector advances to the infrastructure sector, valued at around ₹13-14 lakh crore.
• Cost and Strategic Considerations:
  • While infrastructure bonds are slightly costlier than deposits, their strategic advantage is the ability to provide long-term funding for the infrastructure portfolio without regulatory constraints.

The rise in bond issuances reflects the growing reliance on long-term funding sources to support India’s infrastructure development and credit expansion, with public banks playing a dominant role in this shift.

Credit-to-Deposit (CD) ratio

The Credit-to-Deposit (CD) ratio is a metric used to assess the financial health of a bank. It indicates the proportion of a bank’s deposits that have been lent out as credit.

A higher CD ratio suggests that a bank is lending a large part of its deposits, while a lower ratio indicates more deposits are kept in reserve.

Formula: CD Ratio = (Total Loans / Total Deposits) × 100

Examples:

• A CD ratio of 75% means that 75% of the deposits have been issued as loans.
• A high ratio may indicate liquidity risks, while a low ratio might suggest under-utilization of deposits.