Infrastructure bonds, which were relied upon the most in 2024-25 (FY25) by commercial banks to raise funds through the domestic debt capital market amid lagging deposit growth, seem to have lost their sheen in FY26.
Illustration: Dominic Xavier/Rediff
So far in FY26, no bank has tapped the domestic debt capital market to raise funds via infra bonds, and the expectation is that the amount raised through this route will be significantly lower than that last year, unless credit demand picks up.
Only Bank of India has taken board approval to raise funds via infra bonds.
According to data from rating agency Icra, banks — state-owned and private sector lenders — raised Rs 94,490 crore through infrastructure bonds in FY25. In FY24, through this route, they raised Rs 71,080 crore; in FY23 Rs 29,620 crore, and in FY22 Rs 27,200 crore.
“The need for long-term infra funding appears to have softened,” said an official with a private sector bank.
Infra bonds are debt securities issued by banks to finance infrastructure projects as well as housing loans.
These long-term instruments enjoy exemptions from statutory liquidity ratio (SLR), and cash reserve ratio (CRR) requirements. In FY25, state-owned banks tapped the debt market to raise funds through this route because deposit mobilisation was a challenge across the industry.
“Credit growth has moderated from its earlier highs while deposits are growing at a faster pace in FY26.
“As a result, there is little incentive for banks to raise infrastructure bonds at this stage.
“However, we anticipate that banks may return to the market with such issuances in the third quarter (Q3), once credit growth gains momentum.
“That said, both volume and value of issuances are expected to be significantly lower than last year,” said Anil Gupta, senior vice president & co-head financial sector ratings, Icra.
Data from the Reserve Bank of India (RBI) shows that the pace of bank credit growth slowed to 9.5 per cent year-on-year (Y-o-Y) during the fortnight ended June 27 while deposits grew at 10.1 per cent Y-o-Y during this period.
This marks a sharp decline from the over 17 per cent credit growth recorded during the corresponding period last year.
According to Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, many public sector banks (PSBs) had front-loaded their infra bond issuances last year, building ample funding buffers that are yet to be fully deployed into infrastructure lending.
“With credit growth in this segment remaining steady but not spectacular, the urgency to return to the market is limited.
“Further, institutions like India Infrastructure Finance Company Limited (IIFCL) and National Bank for Financing Infrastructure and Development (Nabfid) have also stepped up their direct lending to infrastructure projects, partially crowding out the need for banks to raise additional long-term funds,” he said, adding that a key dampener for banks to go for infra bonds is the abundant systemic liquidity.
Another important factor is that infra bonds, unlike Tier-2 or AT1 instruments, do not qualify as regulatory capital.
With several PSBs looking to shore up their Common Equity Tier 1 (CET1) ratios and overall capital adequacy under Basel III norms, the preference has shifted this year towards capital-eligible instruments such as Tier-2 bonds and Qualified Institutional Placements (QIPs), Srinivasan added.
CET1 ratio is a crucial measure of a bank’s financial health, representing its ability to absorb losses.
