RBI allows banks to raise Tier II capital via issue of unsecured bonds

The Reserve Bank of India (RBI) has permitted banks to issue subordinated debt or unsecured bonds as Tier II capital with call and step-up options, subject to certain stipulations.

The RBI said it has considered international practices in this regard before reviewing its earlier stipulation on the issue. Banks, however, should ensure that the terms and conditions for the issue of subordinated debt are strictly adhered to, the central bank said in a release today.

At present, banks are allowed to raise lower Tier II subordinated bonds without special features such as call and step-up options.

To be eligible for inclusion in Tier - II capital, the terms of issue of the subordinated debt instruments should be in conformity with the following:

The board of directors of the bank should take a decision on the amount of subordinated debt to be raised, its maturity period and the rate of interest;

Banks should not include subordinated debt instruments with an initial maturity period of less than five years, or those with a remaining maturity of one year as part of Tier-II capital.