Indian banks, including top lender State Bank of India, have raised around 87 billion rupees ($1.05 billion) through perpetual bonds so far this fiscal, just about a quarter of fiscal 2023, with most struggling to raise even the targeted amount at auctions.

"With deposit rates inching higher, banks will have to pay a higher coupon on their debt securities, especially with mutual funds staying away from investing in perpetual debt," a senior official at a large state-run bank said.

Market regulator Securities Exchange Board of India had in March 2021 said that additional Tier 1 bonds would be considered to have a deemed maturity of 100 years, starting April 2023.

"This move has literally ended mutual fund investments in such papers, making fundraising more difficult," a trader with a private bank said.

Demand for these bonds fell further last year, after Credit Suisse wrote off around $17 billion of its additional Tier 1 debt amid its rescue merger with UBS.

"There is a possibility that banks may tap the equity route more for fundraising as valuations will improve further, while getting large quantum with AT-I bonds has become difficult," another banker said.

The sources asked to remain anonymous as they were not authorised to speak to the media.

Last month, state-run lenders Bank of India and Indian Bank raised 45 billion rupees and 40 billion rupees, respectively, via qualified institutional placement (QIP) of shares.

A QIP enables fundraising by offering equity shares to qualified buyers without a public offering.

Union Bank of India had raised 50 billion rupees through a QIP in August.

Last week, Punjab National Bank approved raising aggregate 75 billion rupees via equity.

The Nifty PSU Bank index rallied 32.30% in 2023, outperforming the bank index and financial services index.

"State-run banks have cleaned up their balance sheets well and their valuations are still at a discount," said Vinod Nair, head of research at Geojit Financial Services.

($1 = 83.1650 Indian rupees)

(Reporting by Siddhi Nayak and Dharamraj Dhutia; Editing by Swati Bhat and Varun H K)

By Siddhi Nayak and Dharamraj Dhutia