Indian banks are aggressively raising funds through bonds to fund credit growth in an environment where liquidity is tight and deposits have migrated to other high-returning market-linked instruments.

Banks are expected to close the current financial year with bond issuances at around Rs 1.4 lakh crore, ratings agency Icra said in a note. The gross corporate bond issuances of banks in the first three quarters of the fiscal has already touched an all-time high of Rs 91,500 crore, surpassing the previous high of Rs 80,000 crore in FY17.

Icra said this alternate resource of fund raising by banks is on the back of widening credit-deposit gap caused by a rise in credit demand across all segments while deposit growth has lagged.

Incremental credit expansion stood at Rs 12.7 lakh crore while deposit accretion continued to trail at Rs 8.9 lakh crore, till December 16, 2022.

To bridge this gap, banks have been relying on various sources of funding such as refinance from financial institutions, the drawdown of excess on-balance sheet liquidity and debt capital market issuances. As a result, gross bond issuances by banks surged to Rs 0.9 lakh crore in the first nine months of FY23, up from Rs 0.7 lakh crore in FY22, and surpassing the previous high of Rs 0.8 lakh crore in FY17, Aashay Choksey, vice-president & sector head, financial sector ratings at Icra, said.

He expects the system-wide credit-to-deposit ratio to firm up to 76.3-76.5% by March from 74.8% as of December 16, 2022, and stand considerably higher than the low of 69.6% seen during the pandemic. Accordingly, the overall gross bond issuances by banks may rise to Rs 1.3-1.4 trillion in FY23.

Tier I & II bonds qualify for inclusion in capital ratios besides shoring up growth capital for lenders and boost their liquidity coverage ratios and the net stable funding ratios. Banks also issue long-term infrastructure bonds to fund certain specified eligible assets.

Both public and private banks issued infrastructure bonds, public banks had a higher preference for tier-I bonds while private banks issued more of tier-II bonds.

Within overall bond issuances of Rs 91,500 crore in the first three quarters of FY23, tier-II issuance reached an all-time high of Rs 47,200 crore.