SBI Eyes Rs. 7,500 Crore Through Tier-II Bonds, Signals Aggressive FY26 Start

Tier-II Bonds are Subordinated Debt Issued by Banks to Raise Capital and Meet Regulatory Requirements

Country’s largest lender, State Bank of India (SBI), is set to issue the first domestic bank bond of the current financial year to tap the debt market with 10-year tier-II bonds. The proceeds would likely be used to meet regulatory requirements and support business growth, according to reports.

Details about the Development

The bank aims to raise up to Rs. 7,500 crore through the offering, which has a base issue of Rs. 5,000 crore and a green-shoe option of Rs. 2,500 crore. The bonds will carry a five-year call option. “The bond issue is likely to come this week, with bidding expected on Friday,” according to Mint reports.

The bank is expected to offer a coupon rate of 6.90-6.95% for the upcoming tier-II bond sale.

If it happens in reality, the deal would mark the first major domestic bond issuance by a public sector bank this financial year and could signal other lenders to return to a market that has seen few offerings in recent months.

SBI’s Earlier Fundraising 

The last time SBI tapped the corporate debt market was in September 2024, when it raised Rs. 7,500 crore via 15-year tier-II bonds at a 7.33% coupon. In FY25 (April–March), the bank issued three batches of 15-year infrastructure bonds, raising Rs. 30,000 crore, and raised Rs. 10,000 crore each through tier-I and tier-II bonds.

This planned tier-II issuance comes on top of other funding SBI secured this year, including $500 million via five-year dollar bonds at a 4.50% coupon and Rs. 25,000 crore through a qualified institutional placement. The bank has board approval to raise Rs. 20,000 crore via tier-I and tier-II bonds in FY26.

As of the end of June, SBI’s loan book remained robust, with gross advances rising 11% year-on-year to Rs. 42.5 trillion, slightly lagging deposits, which increased 11.66% to Rs. 54.73 trillion.

The state-owned bank's capital adequacy ratio was at 14.63% at the end of June, of which the CET-1 ratio and tier-1 ratio were at 11.10% and 12.45%, respectively. In comparison, the largest private sector lender, HDFC Bank's capital adequacy ratio was at 19.9%. Of which CET-1 ratio was at 17.4% and the tier-1 was at 17.8% as at June end.

What Experts are Saying?

"Banks remained on the sidelines of the bond market, choosing not to tap for fresh capital because of comfortable liquidity positions, stable deposit growth, and subdued credit demand from corporates...this further depressed overall issuance volumes, especially in the tier-1 and tier-2 capital bond segments that normally bolster monthly mobilisation figures," Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP said.

What are Tier-II Bonds?

Tier-II bonds are subordinated debt issued by banks to raise capital and meet regulatory requirements. In the event of a bank’s liquidation, these bonds are repaid after senior debt holders but before equity holders. They are considered riskier than senior bonds but typically offer higher yields than many other fixed-income investments.

Currently, the yield on the 10-year benchmark is 6.51%. Government bond yields had peaked at 6.64% in August amid uncertainty over US tariffs on India and fading hopes of further rate cuts by the Reserve Bank of India (RBI).

SBI’s bonds usually carry the lowest coupons among bank-issued debt instruments, reflecting investor perception of the bank’s safety, given its size and government ownership.

Challenges & A Ray of Hope

According to Mint reports, after a quiet September quarter, India’s corporate bond market is observing a revival, with major borrowers lining up to raise funds as yields begin to soften following dovish signals from the Reserve Bank of India (RBI).

Meanwhile, the credit growth across the banking sector has remained subdued, discouraging many lenders from raising fresh long-term debt. Demand for loans in the first half of this year has been slightly lukewarm, especially from companies increasingly turning to bonds and commercial paper instead of bank credit.

As of 19 September record, non-food credit growth in India was about 10% year-on-year, down from 13.6% a year earlier, according to the RBI. Deposits rose 9.5% over the same period.

For banks, the cost of liabilities remains high, and yields in the debt market have hardened. Even after recent policy rate cuts, transmission to lending rates has lagged, limiting banks’ ability to expand credit affordably.

In FY25, banks raised a total of Rs. 1.32 trillion via bonds, according to rating agency ICRA Ltd, including Rs. 29,400 crore through tier-II bonds, Rs. 8,000 crore through tier-I bonds, and Rs. 94,488 crore via infrastructure bonds.

Against this situation, SBI’s decision to test the market with a relatively large tier-II bond issue indicates confidence in its funding position and franchise strength, according to market experts. They also predicted that the bank may be aiming to strengthen its capital buffer.