A disappointing debut by India in the contingent capital, or coco bond, market has cast doubt on hopes that the bond sold by State Bank of India would clear a path for others to follow as the country’s banks strive to boost their capital.

India’s largest bank sold $300m of cocos, known as Additional Tier 1 capital in Basel regulatory terms — well below expectations it would sell at least $500m. The notes carried a coupon of 5.5 per cent.


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SBI’s bonds allow for their value to be temporarily written down if the bank’s capital breaches pre-agreed levels. They can also be written off permanently if India’s central bank deems that the bank would become unviable without either an injection of public funds or the cash from the bonds.

Arundhati Bhattacharya, the bank’s chairman, said that the deal nonetheless set a benchmark that would open a new market for Indian banks.

Bankers noted SBI’s bonds were sold into a softer market on Wednesday, with investors spoilt for choice of new issues — a factor that often weighs on the size of deals that can be done.

Asia’s AT1 market is in its infancy compared with Europe, where tougher regulatory standards are seen as increasing the risk of the bonds and thus their costs. In August, Standard Chartered sold $2bn of the bonds with a coupon of 7.5 per cent, in contrast with the record low of 3.6 per cent secured by Singapore’s DBS last month.

Analysts believe, however, that cocos will need to become a key source of capital for the troubled Indian banking sector as it strives to meet Basel III standards.

India’s banks face a cloud over their capital prospects after a welter of soured corporate loans to sectors including infrastructure, steel and power. The problem is severe among the state-controlled banks that account for three-quarters of banking sector assets, of which SBI is by far the largest with assets of Rs22.7tn ($340bn). SBI made Rs214bn of provisions for troubled assets in the first six months of this year.

India’s government is pursuing a plan to inject Rs700bn into the state-controlled banks over the three years to April 2019, when they will be required to comply with Basel III capital standards.

But this sum is widely seen by private sector analysts as far short of what is required: rating agency Fitch on Monday reiterated an estimate that Indian banks, including private sector lenders, would need $90bn in new capital to meet Basel III requirements.

Fitch estimated that about half this sum would need to come in the form of core equity, with AT1 instruments accounting for most of the remainder. It noted that banks had struggled to raise AT1 funding domestically because of “limited [market] depth and weak investor appetite for loss-absorbing instruments”, with issuances since January amounting to only $1.4bn.

“We expect more Indian banks will look to raise capital via [the offshore AT1] route to overcome some of the limitations of the domestic bond market,” said Alka Anbarusa, an analyst at Moody’s.

SBI is rated BBB-minus, or equivalent, by all three main rating agencies.

Bank of America Merrill Lynch, Citigroup, HSBC, JPMorgan, National Bank of Abu Dhabi, SBI Capital Markets and Standard Chartered led the deal.

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