Is SBI's AT1 Issuance A Blip Or Are Banks Back on The Bond Street?

State Bank of India broke a long lull in domestic bank bond issuances with its ₹50-billion Additional Tier-I perpetual bonds this week.

Prior to the deal, there was an over 50% decline in commercial bank bond issuances in 2025-26, and barely any activity in the primary market during the first four months of 2026-27 with commercial banks other than SBI having raised only ₹85 million.

SBI’s return, therefore, looks less like confirmation of a revival, and more like a test of whether investors and issuers are ready to reopen the market. Further, SBI's successful pricing has established a fresh benchmark for domestic bank capital issuances, and is expected to encourage other lenders evaluating AT1 and Tier-II bond sales. Whether that translates into a sustained revival in issuances will depend on individual banks' capital requirements and funding plans. Even so, the data increasingly points to a structural shift, with domestic bond markets becoming a funding option rather than a necessity for much of India's banking system.

Domestic Bank Bond Issuance

*financial year 2026-27 to date

The Retreat
A BasisPoint Insight analysis of primary issuance data from BSE and NSE shows the slowdown began well before the current financial year. Banks raised ₹1.33 trillion through domestic bonds in 2024-25, but that fell by more than half to ₹648.9 billion in the following financial year and virtually disappeared in the first quarter of 2026-27.

The decline is evident not only in the amount raised, but also in issuer participation. Commercial banks floated 42 bond issues in 2022-23, with the number coming down to 35 in the following year and 32 in 2024-25. It further dropped to 21 in 2025-26 before shrinking to just one issue in 2026-27 to date.

The quarterly pattern suggests banks have not exited the market altogether, but are waiting for more favourable conditions before borrowing. That restraint is notable because credit growth has remained healthy, liquidity has improved after the Reserve Bank of India's measures, and investor appetite for high-quality corporate debt remains intact - conditions that would ordinarily support regular bank bond issuances.

So, why have banks stayed on the sidelines?

What Changed?
The explanation emerging from treasury executives is that Indian banks simply do not require wholesale capital as urgently as they did in previous funding cycles.

Alok Singh, Group Head – Treasury at CSB Bank, said, that the capital position of the banking system has improved significantly over the past two to three years. As a result, banks are not under immediate pressure to raise fresh capital through bond issuances. He added sustained profitability has enabled banks to strengthen their Common Equity Tier-I capital through internal accruals, reducing their dependence on external capital raising. Growth in relatively less capital-intensive lending segments, including secured retail portfolios and gold loans, has also helped preserve regulatory capital.

The result is the banking system entered 2026-27 with a position of strength, rather than necessity. Unlike earlier years, when Tier-II and AT1 issuances formed a regular part of capital planning, many lenders today can afford to wait until pricing becomes more attractive before raising capital.

That distinction is important because SBI's transaction is fundamentally a regulatory capital exercise, rather than a funding exercise. The issue does not necessarily imply that the broader banking sector faces an immediate capital requirement.

Wholesale Funding
If stronger capital positions explain why banks do not need to issue bonds, changing funding priorities explain why they have not wanted to.

A senior treasury executive at a bank said that deposit mobilisation has become the dominant funding priority across the sector. "Banks are currently prioritising deposit mobilisation over wholesale bond funding. If a bank is adequately capitalised, it would rather focus on raising deposits to support asset growth than tap the bond market at this stage."

The executive said banks' funding mix has undergone a gradual but important shift over the past year, with higher emphasis on growing the deposit franchise rather than increasing wholesale liabilities.

"The funding mix has evolved over the past year. Deposit mobilisation has become a much bigger focus for banks, and that is influencing how they approach market borrowings," said a bank treasury executive.

The comments reinforce what the issuance data suggests: banks are increasingly relying on internal capital generation and deposits to support balance-sheet growth, making wholesale bond funding a more discretionary source of capital than in previous years.

Being Selective 

Banks increasingly waited for favourable market conditions before issuing bonds

The issuance pattern also suggests banks are becoming more tactical in their approach to debt markets. After issuing almost no bonds during the first half of 2025-26, banks returned in the second half when pricing conditions became more favourable. This behaviour reinforces what treasury executives had said in conversations with BasisPoint Insight - that banks today have the flexibility to postpone long-term borrowings until market conditions improve.

"Given the volatility in interest rates, banks may not be comfortable locking themselves into long-term fixed-rate borrowings. Many would prefer to wait for a more favourable rate environment before returning to the bond market," another treasury executive said.

That caution becomes particularly relevant for AT1 instruments, where investors demand a significant premium over senior debt because of the securities' perpetual nature and loss-absorption features. For many issuers, waiting a few months for more favourable pricing can materially reduce long-term funding costs.

SBI's pricing, therefore, assumes significance well beyond the transaction itself. It establishes the first meaningful benchmark for domestic bank capital issuances this financial year against which future AT1 and Tier-II offerings are likely to be measured.

State Bank of India priced the perpetual Basel III-compliant AT1 bond at a 7.75% annual coupon, accepting 46.91 billion rupees at the cut-off yield against the proposed issue size of ₹50 billion.

The transaction also provides an important historical comparison. SBI had last accessed the domestic AT1 market in October 2024, when it raised perpetual capital at a 7.98% coupon. The latest issue priced 23 basis points lower, indicating an improvement in funding conditions for high-quality bank regulatory capital.

"The issue has priced broadly in line with market expectations. Pricing at the cut-off coupon should encourage other banks planning perpetual capital issuances to evaluate the domestic market," said Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP.

"The transaction establishes an important pricing benchmark for regulatory capital instruments. While AT1 issuances are the immediate takeaway, it should also provide confidence for banks considering Tier-II and long-term infrastructure bond issuances," Srinivasan said.

"The pricing provides an important benchmark for the market. Whether other banks return to the domestic bond market will now depend on their capital requirements and funding plans," said Alok Singh, Group Head - Treasury at CSB Bank.

FCNR(B) Flexibility?
The Reserve Bank of India's temporary relaxation relating to Foreign Currency Non-Resident (Bank), FCNR(B), deposits has added another dimension to banks' funding strategy by improving access to overseas deposits.

RBI Governor Sanjay Malhotra recently said the central bank's June foreign exchange measures had attracted nearly $39 billion of foreign capital, including around $32 billion through FCNR(B) deposits and more than $7 billion into government securities. The inflows, he said, had materially reduced tail risks for the rupee, allowing the Monetary Policy Committee to remain on pause while assessing their impact on liquidity and external balances.

Even so, treasury executives cautioned against attributing the sharp fall in domestic bond issuance primarily to FCNR(B) inflows, noting that the slowdown had begun well before the RBI announced the temporary relaxation.

"As FCNR(B) inflows gather pace, banks could have additional flexibility on funding. With no pressing need to raise capital immediately, they can afford to wait for more favourable conditions before accessing the domestic bond market," Singh said.

Another treasury executive expressed a similar view, saying FCNR(B) deposits provide additional funding flexibility but should not be mistaken as the principal reason behind lower domestic bond issuance.

Instead, the conversations suggest FCNR(B) has reinforced an already comfortable funding position rather than fundamentally changing banks' funding behaviour.

Turning Point?
SBI's AT1 transaction will ultimately be judged by whether it encourages other banks to return to domestic debt markets.

"If the pricing is favourable, it could encourage other banks to evaluate capital market issuances," Singh said.

That is the key question for India's bank bond market.

If lenders such as Canara Bank, Bank of India, Union Bank of India, Punjab National Bank or Indian Bank return over the coming quarters, SBI's issue may be remembered as the transaction that reopened the market.

If issuance remains sporadic despite favourable pricing, the conclusion will be different.

The data and treasury conversations point to a structural shift in banks' funding behaviour. Stronger profitability, healthier capital buffers and a renewed focus on deposits have reduced dependence on wholesale bond funding. Rather than disappearing, the domestic bond market appears to have become one that banks access by choice rather than necessity.

For treasury professionals, the significance of SBI's AT1 issue lies not merely in the ₹50 billion it raised, but in whether it marks the beginning of a new issuance cycle or simply confirms that India's commercial banks have fundamentally changed the way they fund themselves.