Mumbai: Half a dozen public sector lenders are aiming to at least Rs 10,000 crore from the local market this quarter by selling Additional Tier-1 (AT1) bonds, encouraged by strong investor response to ’s bond sale last month, three people familiar with the matter told ET.

SBI is set to tap the market again, while Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India and Indian Bank, too, are considering selling these bonds, which are also called perpetual bonds as they come with no tenor.

The sale could test investor interest in some of these lenders, which may have to offer as much as 9.40% to raise capital at a time when the local market is getting crowded with credit demand returning.

Private sector lenders HDFC Bank and Axis Bank recently sold AT1 bonds in the offshore market, but the state-run banks may not find many takers abroad for this instrument which is seen as riskier than regular bonds.

A Bank of Baroda spokesperson said the lender had not decided yet on raising capital, “but we are open both for onshore and offshore depending on rate outlook and size of the issue”. The bank has board approval to raise ₹5,000 crore of capital, including equity and debt, in fiscal 2022.

Other banks did not reply to ET’s queries till press time Wednesday.

More than two weeks ago, SBI, the country’s largest lender, raised Rs 4,000 crore selling AT1 bonds in the local market, offering 7.72%. The bond sale came after a hiatus, caused by stricter rules imposed by the Securities Exchange Board of India to value the holding of such papers that led mutual funds to stay off the market.

Large companies, wealthy investors and private sector banks subscribed to those quasi-debt instruments, which are now yielding about 10-12 basis points lower in the secondary market as the prices have moved up. Existing investors are either sitting on mark-to-market gains or selling them to take profits.

SBI is again planning to raise another Rs 4,000-5,000 crore this quarter. PNB, Canara Bank, Bank of Baroda and Union Bank of India have a window to raise Rs 3,000-6,000 crore. The rest may have a window of about Rs 1,000-2,000 crore.

According to market experts, banks other than SBI should be able to raise up to Rs 1,000 crore each as traditional local investors have shied away from such securities.

The expected rates could be in the range of 8.50-9.40% depending on the individual ratings of the banks. An AT1 rating grade comes two-three notches lower than a general corporate rating because of the higher risk.

Mutual funds, once major AT1 buyers, almost stopped subscribing to those papers in the local market, prompting top-draw lenders to tap offshore investors. HDFC Bank and Axis Bank have raised money overseas, setting a precedent.

“All banks are not well known among overseas investors and shall be reluctant to tap offshore markets. In fact, those investors demand abnormally higher rates for lower-than-investment-grade ratings of these papers,” said Ajay Manglunia, managing director – fixed income at JM Financial. “While domestic institutional investors seek to book profits in the secondary market, wealthy investors tend to hold them for the long term in search of higher yields and better carry,” he said.

The problem with most of the government-owned banks is the hedging cost. Private banks have a larger offshore presence paving the way for natural hedges that saves the cost of covering currency risk. And, money is fungible.

AT1 adds to banks’ capital base unlike perpetual papers issued by companies. Such securities do not have any fixed maturity but generally have a five-year call option that allows an exit route for investors.