India's banking sector is witnessing a significant surge in fundraising activity, with lenders poised to mobilize up to Rs 15,000 crore through Tier II bonds by the end of December 2025. This wave of capital raising comes amidst a booming market for initial public offerings (IPOs) and is driven by a unique confluence of market demand and regulatory factors.
What are Tier II Bonds?
Tier II bonds are specialized debt instruments issued by banks specifically to fortify their capital foundation and support ongoing business expansion. Under Basel III norms, these bonds, which must have a minimum maturity of five years, play a crucial role in helping banks maintain healthy Capital Adequacy Ratios (CAR) and Capital to Risk-Weighted Assets Ratio (CRAR).
According to Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, these instruments offer an efficient, low-cost method for securing long-term capital without diluting existing equity. Prakash Pandey of Fitch Ratings adds that they provide banks with "long-term funding and also allow banks to add some extra buffers to their CRARs."
The Current Surge in Issuances
The momentum is already evident. The country's largest lender, the State Bank of India (SBI), recently set a strong benchmark by raising a substantial Rs 7,500 crore through 10-year, Basel III-compliant Tier II bonds at a competitive coupon rate of 6.93%. Earlier, in June, ICICI Bank raised Rs 1,000 crore via a similar route.
Analysts estimate that the banking system could raise a total of around Rs 25,000 crore in the current financial year through these instruments, with nearly Rs 10,000 crore already secured. This follows a robust previous financial year where lenders raised close to Rs 31,000 crore.
Key Drivers Fueling the Demand
Several powerful factors are converging to create a perfect environment for these bond issuances.
Market Dynamics and Rate Expectations: A significant trigger is the strong investor appetite for long-duration papers. With most corporate issuers favoring short-term bonds this fiscal year, a clear gap has emerged for long-tenor instruments. This scarcity is intensified by expectations of a 25-basis-point repo rate cut by the Reserve Bank of India in its December policy, prompting long-term investors to deploy funds sooner rather than later.
Regulatory and Refinancing Needs: Provident and pension funds are expected to accelerate their investments in the coming months to meet regulatory quotas for corporate bond holdings. Furthermore, several large banks are looking to refinance older bonds where call options are being exercised. SBI's aggressively priced issue has renewed issuer confidence, setting a clear benchmark for the market.
Strategic Capital Planning: As Venkatakrishnan Srinivasan notes, "At a time when market conditions are stable, investor appetite is high, and yields remain attractive, it makes strategic sense for banks to shore up their capital through the bond route." Many banks had secured board approvals earlier but waited for optimal conditions, which now appear favorable.
However, Prakash Pandey of Fitch offers a note of perspective, stating that Indian banks, being predominantly deposit-funded, do not rely on Tier II bonds for core funding or capital adequacy. Most institutions possess sufficient capital buffers and internal capital generation to meet regulatory demands, meaning future issuances will remain opportunistic, dictated by market conditions.
