KOCHI: South Indian Bank (SIB) has wriggled out of an expensive capital-raising legacy by redeeming a Rs500 crore Tier 1 bond carrying a steep 13.75 per cent coupon rate, saving the Thrissur-headquartered lender about Rs40 crore annually in interest payout.
The bond, issued in 2020 when the bank was grappling with capital adequacy concerns, had helped SIB shore up its Tier 1 capital during a difficult phase.
However, with SIB now comfortably placed on the capital front, it exercised the first call option to redeem the bond, becoming one of the few lenders to proactively exit a high-cost capital instrument.
The move has brought down the bank’s Capital to Risk-Weighted Assets Ratio (CRAR) by about 95 basis points, but SIB continues to hold a healthy capital cushion. Prior to the redemption, its CRAR stood at 18 per cent. Encouragingly, with a likely record full-year net profit of around Rs1,300 crore in FY25, the bank could restore and even improve its CRAR to nearly 19 per cent by year-end, said people familiar with the matter.
The redemption underscores SIB’s improved financial position and marks a sharp turnaround from its 2020 status, when the bank was forced to tap expensive capital options to stay above regulatory thresholds.
The Rs500 crore bond was one of the costliest capital instruments in the market at the time, with the interest rate much higher than the prevailing market average. With this redemption, the bank has freed up financial headroom for growth while also improving profitability.
More gains lined up
Another Rs300 crore bond with a coupon of 10.25 per cent is due for redemption in October 2025, while the only remaining bond – Rs490 crore – is scheduled for redemption only in May 2028.
The operating momentum of SIB remains strong, with gross advances rising 9.97 per cent to Rs88,447 crore as of March 31, 2025, from Rs80,426 crore a year earlier.
However, deposit growth lagged, rising just 5.5 per cent to Rs1.08 lakh crore, pushing the credit-deposit (CD) ratio to 82.26 per cent from 78.91 per cent a year ago.
SIB is also expected to benefit from the recent 0.5 per centage point cut in the Cash Reserve Ratio (CRR) announced by the RBI in December as it helped lend an additional Rs5,000 crore in the market.
The lifting of the 25 per cent additional risk weight by RBI on NBFC lending from April 1 will also give the bank additional headroom for lending. These moves will enable banks, including SIB, to expand their loan books without additional capital strain – especially crucial in a tight deposit mobilisation environment.
