Canara Bank is the first Indian lender to test investor appetite for these higher-risk capital instruments this financial year. The last time an Indian lender raised funds through AT-1 bonds was in October 2024, when State Bank of India borrowed ₹5,000 crore at 7.98%.
The public sector lender’s decision has prompted peers Punjab National Bank (PNB), Bank of India, Union Bank of India and Bank of Maharashtra to begin sounding out investment bankers on their own issuances, with Bank of Baroda also examining a tier-II raise, the people cited above said.
PNB plans to raise up to ₹5,000 crore via AT-1 bonds— ₹2,000 crore as a base issue and a ₹3,000 crore greenshoe—while Union Bank is looking to borrow up to ₹2,000 crore through AT-1 and another ₹4,000 crore via tier-II bonds in December, one of these people said.
Basel-III-compliant tier-1 bonds are perpetual instruments with trigger points linked to a bank’s capital and earnings. If these thresholds are breached, interest payments can be halted. These are among the riskiest bank capital instruments and come last in the repayment hierarchy. In 2020, when Yes Bank was restructured, its AT-1 bonds were fully written off.
Tier-2 bonds, meanwhile, are subordinated debt issued to meet regulatory requirements. They are repaid after senior debt holders but before equity holders in the event of liquidation and typically offer higher yields than safer fixed-income instruments.
Bankers believe that Canara Bank’s AT-1 bond, expected to have been priced at a coupon of 7.5-7.55% and slightly higher than ICICI Bank’s recent tier-II issuance, could immediately pave the way for more AT-1 supply from public-sector banks.
The 10-year benchmark government bond yield is currently at around 6.51%.
“Everyone is ready with approvals. If Canara’s deal gets strong demand at a reasonable price, others will follow,” a senior treasury official said, adding that lenders are not desperate for capital, making pricing the deciding factor. “If the pricing doesn’t work, banks still have other avenues.”
Emails sent to Canara Bank, PNB, Bank of India, Union Bank of India, Bank of Maharashtra, and Bank of Baroda remained unanswered till press time.
Deposit pressure
The renewed interest marks a shift after banks spent most of this year staying away from the local bond market.
Credit growth across the system has been subdued, deposit mobilization has lagged even further, and lenders have largely been well-capitalized, choosing instead to raise money through qualified institutional placements or, in a few cases, overseas bonds, said the people cited above.
As of 31 October, non-food credit growth stood at 11% year-on-year, down from nearly 12% a year earlier, while deposits rose 9.7%, compared with 11.8% in the previous year.
With credit expected to pick up in the second half of the year, according to market participants, many banks are preparing to bolster their buffers. State Bank of India (SBI), earlier this month, raised its credit growth guidance to 12-14% from 11-12%, betting that tax and rate cuts will lift loan demand.
“Bond issuances have become a key contributor to liability management for banks. Tightness in the deposit market has actually led banks to look for more bond issuances,” Soumyajit Niyogi, director, India Ratings and Research, said.
“I expect some pickup in credit, which usually happens in the second half. Now if the tariff situation improves, there will be some pickup, not something big. To fund this, banks are actually beefing up their liability,” Niyogi added.
Private-sector lenders have already begun to move.
ICICI Bank on 27 November raised ₹3,945 crore via 15-year tier-2 bonds at 7.40%, while Axis Bank on 25 November raised ₹5,000 crore through 15-year infrastructure bonds at 7.27%.
SBI, which had initially evaluated an AT-1 issue before opting for a dollar bond after the sovereign rating upgrade in September, returned to the local market in October with a tier-2 sale that raised ₹7,500 crore, the first bank bond issue of the year.
For banks, the cost of liabilities remains high, and yields in the debt market have hardened.
“My understanding is that the LDR (loan-to-deposit ratio) is inching up and deposit growth rate is not catching up because banks are struggling to get deposits, that’s why they are getting into non-deposit channels,” a senior banking analyst said.
Even after recent policy rate cuts, transmission to lending rates has lagged, limiting banks’ ability to expand credit affordably.
Indian banks raised ₹1.32 trillion through bonds in FY25, including ₹29,400 crore in tier-2 bonds, ₹8,000 crore in tier-1, and ₹94,488 crore in infrastructure bonds. In FY24, the total was ₹1.02 trillion, with ₹13,864 crore raised via tier-2, ₹17,516 crore via AT-1, and ₹71,081 crore in infra bonds.
