Indian lenders are rushing to raise funds via longer term infrastructure bonds amid an increase in federal government spending.
Banks have raised 310 billion rupees ($3.73 billion) via infrastructure bonds in the first six months of this financial year, already surpassing last year's total of 296 billion rupees, according to data compiled by Reuters.
This includes the 50 billion rupees state-run Canara Bank raised through 10-year infrastructure bonds on Tuesday and the State Bank of India's 100 billion rupees via 15-year bonds last week. Top private lender ICICI Bank raised 40 billion rupees via similar bonds at 7.57% on Wednesday.
"Road, solar and wind (energy) projects are among the major sectors absorbing this infra money," said Rajkiran Rai, managing director of National Bank for Financing Infrastructure and Development (NABFID), which raised 100 billion rupees in its maiden bond issue in June.
"Power generation and transmission projects are also rising. Government is spending heavily on transmission, and there are also refinancing needs," Rai said.
The federal government aims to spend 10 trillion rupees this year on long term projects to boost growth.
Strong investor demand
The growing supply of long term bonds from Indian lenders has been met with strong demand from long-term investors, which helped banks raise funds at a smaller spread over government bond yields.
"Infrastructure spending may be advanced as we are due for general elections by 2024," said Arnab Choudhury, executive vice president and group head, DCM at SBI Capital Markets.
"There is appetite from investors for longer tenor and there is limited supply, so issuers can benefit from that."
Insurance and pension funds have been the biggest buyers of infrastructure bonds amid strong inflows, said Aneesh Srivastava, executive director and chief investment officer at Star Health Insurance.
"Investors are buying bonds as they cannot sit on cash for long when inflows are rising," said Srivastava.
SBI raised funds at a coupon rate of 7.49% while the comparable 14-year government bond yield was around 7.20% on a semi-annualised basis, data from LSEG showed.
"The spreads between infra bonds and government bond yields have come down...So, this would also nudge other lenders to opt for higher duration infra bonds of may be around 10 years," SBI Capital Markets' Choudhury said.
