AT1 bonds are instruments that have no maturity date. The issuer has the option to cancel the bonds or repay the principal after a specific period of time. The bonds come with higher periodic payouts, which are attractive to investors, but risks are also higher since the issuer can sometimes choose to skip payments.
For some banks, Indian investors offer little respite and so they may be forced to raise capital overseas.
"One question we had for banks is if they will actually have to tap the offshore market for AT1," CreditSights analysts said. "The consistent answer was yes and this is because of a still thin domestic investor base."
Until further actions are taken by either the government or the banks, most analysts expect loan growth to stay weak and earnings to remain muted at the public sector banks.
Total bank loans in India grew around 5 percent in the fiscal year that ended in March — the slowest pace in more than six decades, Reuters reported. Recent central bank data showed loan growth accelerated above 6 percent in September, but that still pales in comparison to the double-digit increase commonly seen this decade.
"We think that we are close to the bottom of the credit cycle. We do see positive momentum in certain segments with revenue growth starting to increase, profitability increasing (so) at the margins, things are beginning to look better. But we think it's a very slow, gradual improvement," said Chugh.