Masala Bonds Opens Market for Bank Capital

According to Fitch Ratings, ‘Masala bonds’ issued in offshore capital markets would widen the investor pool and ultimately deepen the market for Additional Tier 1 (AT1) and Tier 2 (T2) bond issuance.

This measure would ease a key constraint for banks in accessing new AT1 and T2 capital, given the limited size of the domestic investor pool relative to the scale of the capital needed.

Fitch estimates a capital shortfall of USD 90bn over the next several years as Basel III regulatory requirements build from the financial year 2017 (FY17) to FY19.

The Reserve Bank of India’s (RBI) proposal to allow banks to issue ‘Masala Bonds’ came as part of a series of measures pertaining to India’s fixed-income and currency markets announced on 25 August.

The masala bonds market remains in its infancy, however, with the RBI’s initial regulatory framework put in place only in September 2015 – and the first issues, by corporates HDFC and NTPC, only completed in July and August, respectively, this year.

As such, the extent to which banks will be able to use the masala bonds channel to raise capital remains to be seen, and will depend to a large extent on foreign-investor risk appetite and pricing.