PSBs to drive bond issuances to record high of Rs 1.3 lakh crore this fiscal: ICRA

Public sector banks (PSBs) are set to lead bond issuances, with infrastructure bonds playing a key role, according to a recent ICRA report. PSBs are expected to account for 82-85% of total issuances in FY2025, helping drive total bank bond issuances to Rs. 1.2-1.3 lakh crore, surpassing the previous record of Rs. 1.1 lakh crore set in FY2023.

ICRA’s analysis of 13 large banks revealed that infrastructure bonds outstanding stood at Rs. 2.2 lakh crore as of August 2024, against an infrastructure loan book of Rs. 11 lakh crore as of June 2024. Most banks have issued bonds for less than 40% of their loan books, showing room for further issuances.

Tight liquidity and credit growth growing faster than deposit have led banks to increasingly rely on bonds. As of FY2025 year-to-date, bond issuances have hit Rs. 76,700 crore, a 225% YoY growth.

Private banks, focusing on managing their credit-to-deposit ratios, have taken a back seat, leaving PSBs to dominate bond issuances. The government’s focus on infrastructure spending and strong demand from insurance companies and provident funds have further supported bond activity.

“During FY2015 to FY2022 Public sector banks had a negligible share in infrastructure bond issuances. However, with improved capital position, tight funding position and sizeable infrastructure loan book, the PSBs became dominant in the issuance of infrastructure bonds and accounted for 77% of banks’ infrastructure bond issuances in FY2023-FY2025 (YTD). The trend is expected to continue through FY2025 with the PSBs likely to account for 82-85% of the bank bond issuances in FY2025 and infrastructure bonds are expected to account for more than 2/3rd share,” said Sachin Sachdeva, VP at ICRA.

In the past, bank bond issuances were driven by Tier 1 and Tier 2 instruments for capitalisation. However, improved profitability since FY2023 has shifted the focus toward infrastructure bonds. PSBs, with a stable deposit base and a large share of infrastructure lending, are better positioned than private banks to provide long-term funding, ICRA said. As of June 2024, the banking sector’s total infrastructure loans stood at Rs. 13-14 lakh crore, with PSBs holding around 75% of this share.