India’s demonetisation drive squeezes capital deployment

Author: Brian Yap | Published: 17 Jan 2017

India has made rooting out money-laundering a national goal, but its drastic demonetisation move has left banks feeling uneasy about deploying capital.  

With domestic banks required to meet an eight percent tier-1 ratio (up from the current seven percent), under the Basel III norms effective from April 2019, more and more public lenders have turned to offshore perpetual additional tier-1 bonds to raise capital. The drive to offshore dollar and rupee-denominated debt-raising, known as masala bonds, was propelled by the Reserve Bank of India (RBI)  lifting a ban on domestic banks to tap both the onshore corporate bond market and the offshore rupee debt market on August 25.

But a different phenomenon has seen domestic financial institutions, flushed with deposits as a result of the demonetisation move, implement plans to raise additional capital offshore through either masala or additional tier-1 bonds.

"Indian banks may be slow in...