INFRASTRUCTURE
BONDS BY BANK OF INDIA (BOI): ECONOMY
NEWS:
Bank
of India plans to raise Rs 5,000 crore via 10-year infra bonds
WHAT’S
IN THE NEWS?
Bank of India (BoI) will issue 10-year infrastructure
bonds worth ₹5,000 crore, including a greenshoe option of ₹3,000 crore, to fund
long-term infrastructure projects. These bonds, exempt from CRR/SLR
requirements, offer banks cost-effective funding for sectors like steel, roads,
and renewable energy.
Infrastructure
Bonds by Bank of India (BoI)
Key
Details of Bond Issuance
Objective: To raise funds for long-term infrastructure
projects.
Structure
of the Issuance:
·
Base Size: ₹2,000
crore.
·
Greenshoe Option: An additional ₹3,000 crore if demand exceeds expectations.
·
Total Size: ₹5,000
crore.
Tenor: The bonds will have a maturity period of 10 years,
with a minimum tenor of 7 years as per regulatory guidelines.
Significance
of Infrastructure Bonds
Regulatory
Exemptions:
·
No CRR/SLR Requirements: Funds raised through infrastructure bonds are
exempt from maintaining the Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR).
·
Benefit: Unlike
Certificates of Deposit (CDs) or retail deposits, these funds can be fully
utilized for income-generating activities, making them more economical for
banks.
Demand
Drivers:
·
Government Spending: Increased investment in infrastructure development projects.
·
Target Sectors: Steel,
roads, and renewable energy are key sectors that drive the need for long-term
funding.
Bank
of India’s Fundraising Plans
·
FY 2024-25 Goal: ₹10,000 crore through long-term infrastructure bonds.
·
Previous Issuance: In July 2024, BoI raised ₹5,000 crore through similar 10-year
infrastructure bonds at a coupon rate of 7.54%.
Explanation
of Key Terms
Greenshoe Option:
·
Definition: A
mechanism that allows underwriters to sell additional shares (up to 15% more)
during an Initial Public Offering (IPO) to stabilize prices in case of high
demand.
·
Purpose: Reduces
market volatility and meets excess demand.
·
Example: If 100
million shares are issued with a 15% Greenshoe option, an additional 15 million
shares can be issued if required.
Coupon
Rate:
·
Definition: The
annual interest rate paid by the bond issuer to the bondholder, expressed as a
percentage of the bond’s face value.
·
Example: A bond
with a face value of ₹10,000 and a coupon rate of 8% pays ₹800 annually as
interest.
·
Importance: Helps
investors assess the return on bonds compared to other investment options.
Certificates
of Deposit (CDs):
Definition: Short-term money market instruments issued by banks
and financial institutions to raise funds.
Features:
·
Issued at
a discount to the face value.
·
Tenure
ranges from 7 days to 1 year.
·
Transferable
bearer instruments, offering slightly higher interest rates than savings
accounts due to fixed tenure.
Statutory Liquidity Ratio (SLR):
The percentage of a bank's liabilities that must be
kept in liquid assets like cash, gold, or government securities. SLR
ensures that banks have enough liquid assets to meet customer demands and other
contingencies.
Cash
Reserve Ratio (CRR):
The percentage of a bank's deposits that must be kept
with the central bank in the form of cash. CRR is used to control the flow
of money in the economy and regulate the amount of funds that banks can
lend.