SBI, LIC likely to seal Rs 6,000 crore bond deal

MUMBAI: The Life Insurance Corporation and banking behemoth State Bank of India are all set to walk together at the beginning of the year as they are likely to seal a Rs 6,000-crore bond deal, people with direct knowledge of the matter told ET.

The move would secure claims from millions of policy holders earning good rates while the expected capital support may lift the bank’s shareholder confidence, which has taken a hit due to large chunk of bad loans eating into profits.

Negotiations are now at advanced level to determine the rates at which LIC of India will subscribe those bank bonds in the one-on-one deal. Bonds would be of 10-year maturity with a call option after five years when the issuer could call back the issue.

"Amid weak equity market sentiment, it is wise to tap the debt market for capital support," said Daljeet Singh Kohli, Head of Research, IndiaNivesh. "The bank will have funds to expand its loans in case of a sudden demand toward the fiscal year-end."

"With lower burden of bad loans, SBI is better-placed compared to other public sector banks," he said.

All those securities are Basel III (an international standard for bank capital base) compliant tier-II bonds, which help banks augment their capital base. For state-run banks which are starved of capital, the issuance provides a buffer to lend when the demand for loans picks up in the next few months. But rates at which banks borrowed reflect their weak finances because of which they had to pay higher than current market rates.



In December last week, the bank sealed a similar deal with the Employees’ Provident Fund Organisation, one of the largest domestic institutional investors, only to sell Rs 4,000 crore worth of similar maturity bonds at 8.33 per cent, which was about three-four basis points higher than then existing secondary market corporate bond yields.

But other state-owned banks where too, EPFO invested, had offered similar securities at least 15-20 basis points higher rates. "LIC is apparently claiming a few basis points higher than EPFO rate as it will subscribe higher quantum," said a one of the sources cited above adding that the deal would not happen lower than EPFO rate.

SBI about a month ago, decided to raise up to Rs 12,000 crore by selling such bonds through private placement.

SBI’s capital adequacy ratio, as of end September, was 12.17 per cent against mandated 9 per cent.