RBI issues norms for subordinated debt

The Reserve Bank of India (RBI) on Wednesday issued guidelines on subordinated debt to retail investors. The apex bank has also cautioned banks on several issues.

The central bank said for floating-rate instruments, banks should not use its fixed deposit rate as the benchmark. Accordingly, the issuer has to clearly explain the difference between a subordinated bond and a fixed deposit, as bond is not covered by deposit insurance. The guidelines would be applicable with immediate effect, the RBI said.

Investors have to declare that they have understood the terms of the specific issue, the central bank stated.

Tier-II bonds are issued by banks to raise capital. Lower tier-II bonds have a typical maturity of 10 years, while upper tier-II debt, which qualifies as hybrid securities, typically matures in 15 years.

Earlier FE had reported that State Bank of India (SBIN.NS : 2003 -12.1), the country's largest lender, is planning to raise Rs 3,000 crore via retail bonds and would be a trendsetter for other banks in this regard.

"We are planning to raise Rs 3,000 crore via retail bond during the current fiscal. Apart from it, we are also planning to raise Rs 3,000 crore through few other instruments, but we are yet to finalise them," said a SBI official. SBI, which is likely to offer over 8% for 10-year tenure had linked its return to a 10-year G-Sec, has applied to the RBI and Sebi for necessary approval.

However, market players say more nationalised banks may take the route of issuing long-term retail bonds. "We believe this step by SBI would be a test plan which will happen during the quarter. Moreover, it's a good avenue for retailers for long-term investments. RBI also wants banks to come up with such bonds and we think retailing of bonds will take shape in the future," said a dealer at a public sector bank.

"SBI's long-term bonds will be a success as there will be huge demand for the same. Other banks will also follow suit. There will be such new kind of instruments in the market giving consumer another choice," said Golak C Nath, vice-president, economic advisor with CCIL.