PSU banks dominated bond issuances in FY25, more Tier-II debt raise likely this fiscal

Bonds

The bond market saw state-owned banks heavily raising funds through Tier-I and Tier-II bonds last fiscal while private lenders stayed almost completely absent from the segment, with experts projecting more such issuances by PSU lenders in FY26 as well.

According to Primedatabase, PSU banks raised Rs 47,690 crore through a combination of Tier-I and Tier-II bonds in FY25 as compared to just Rs 1,000 crore raised by private banks, and Rs 2,196.80 crore by small finance banks.

In the PSU space, the largest issuance was by State Bank of India, at Rs 20,000 crore through Tier-II and AT1 bonds, followed by Bank of India at Rs 10,190 crore. Experts said the higher issuances by the state-owned banks shows the confidence of investors in the sovereign backing and stability of these banks.

“FY25 reaffirmed the dominant role of public sector banks in the hybrid capital segment of India’s bond market. While Tier-1 bond issuance was modest - estimated at around Rs 8,000 crore - the bulk of the activity was concentrated in Tier-2 bonds,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

He added that these instruments, which offer regulatory capital under Basel III norms, provided an attractive option for banks to bolster their Capital Adequacy Ratios (CAR) without diluting equity or exposing themselves to coupon volatility typically associated with AT1 bonds.

Absence of Private Banks

Private lenders have been totally absent from hybrid bond issuances in FY25. Despite favorable market conditions for Tier-2 debt, these banks, supported by strong CET-1 buffers and healthy profitability, chose to rely on internal accruals and equity-driven capital planning, said experts.

According to data compiled by Moneycontrol, the CAR of private banks remained in the range of 15-23 percent in Q1FY26.

Rockfort’s Srinivasan said AT1 bonds continue to face investor skepticism due to legacy overhang and past write-down episodes. Unless credit growth revives, private sector participation in hybrid instruments is expected to stay limited. At best, some lenders may explore small-scale Tier-2 issuances for market signalling or visibility, he added.

SFBs Explore Tier-II bonds

Small finance banks have shown a significant interest in the bond market by raising funds through Tier-II bond issuances in FY25.

Lacking the rating strength for AT1 issuance and facing RBI’s tighter regulatory limits, small finance banks have turned to niche segments such as NBFC treasuries, private credit funds, HNIs and family offices, who were willing to accept double-digit yields in exchange for risk-adjusted returns, experts added.

The deal sizes remained modest, usually under Rs 500 crore in most issuances.

The Way Ahead

Money market experts said banks are expected to issue more Tier-II bonds in FY26. “With board approvals already in place for several PSBs and favorable market dynamics, Tier-II issuances are poised to remain the cornerstone of capital strategy across the banking spectrum,” one money market dealer said.

The infrastructure bonds could see muted issuances in FY26, as most banks have already raised funds heavily through these instruments during FY25.