The Reserve Bank of India (RBI) has announced that Indian banks will now be able to issue masala bonds to raise Tier 1 and 2 capital, as well as raise bonds to finance infrastructure and affordable housing projects across the country.
Masala bonds, or rupee-denominated bonds issued outside of India, transfer the currency risk to investors, making them a popular instrument amongst Indian issuers.
According to the RBI, any bank-raised bonds will come within the Rs2.44 lakh crore (Rs2.44tn) foreign investment limit for corporate bonds. Previously, only non-bank financial corporations (NBFCs) have been able to issue masala bonds.
Bejoy Das Gupta, senior Asia-Pacific economist at the IIF noted that the reason any bank-raised masala bonds will come under this limit was because corporates and NBFCs were not attracting the international demand initially expected with masala issuances.
“The debt issuance limits were not being reached, so with the aim of utilising more of this borrowing limit, the RBI has allowed banks to join their non-bank financial counterparts and corporates in issuing masala bonds,” he said. “There are a lot of underexploited limits.”
Furthermore, Das Gupta added that as banks are in need of additional capital, it made sense to tap into the enhanced limits on holdings of non-government bonds, in addition to capitalising on the opening up of the country to the international markets.
High NPL ratios and widespread debt restructuring across the sector, largely a problem of the legacy loans, continues to plague Indian banks. Stressed loans across the sector rose 15% over the last six months to June this year to US$138bn, according to figures from the Central Bank.
Nevertheless, the banking sector continues to require additional funding.
Firstly, they need capital to continue with the adoption of Basel III. Although there has already been some gradual progress to this end, full implementation of the system will continue through 2019.
To this end, one of the RBI’s stipulations for the issuance of masala bonds by Indian banks is that the proceeds go towards boosting Tier 1 and 2 Capital – certain levels of which are required for complying with Basel III.
The RBI’s second stipulation for the use of any proceeds raised by masala bonds is that they finance infrastructure and affordable housing projects across the country.
This is arguably a tactical decision to coax Indian lenders back towards financing such projects, from which they have been noticeably absent over the last few years.
“Given the loan problem banks face, they have shied away from infrastructure finance and corporate lending and are doing more consumer loans,” noted Das Gupta.
He added that the recent lack of infrastructure finance from the banking sector was the result of the focus on cleaning up the legacy problem.
However, legacy problem aside, banks should be able to achieve tight pricing on any masala bonds they issue.
“On the external side India has a very good story. The country has a very small current account deficit, and is over-financed on the capital account. It is in general a good risk to hold, yields remain attractive, at around 7-8%.”
India’s current account deficit for Q2 2016 was recorded at US$300mn, or 0.1% of GDP according to the RBI.
“It is a good time to allow banks to issue masala bonds. There is a window of opportunity, and the country is opening up to the international markets cautiously, as it should be doing.”
It appears that there will already be noticeable masala bond issuance in the coming months, with the UK Prime Minister Theresa May recently announcing that Indian companies are planning to issue US$600mn worth of masala bonds in London – although whether this will include bank issuance is yet to be determined.
