RBI removes interest rate spread cap on PD Tier II/III bonds
Current · Source: Reserve Bank of India · RBI/2008-09/424 · issued 01 Apr 2009 · ~1 min read
Quick answerRBI has removed the 200 bps ceiling on interest rate spreads for subordinated Tier II and Tier III bonds issued by standalone Primary Dealers. Boards can now decide coupon rates freely, effective immediately.
The rule, in the simplest words
RBI removed the 200‑basis‑point (0.2%) ceiling on the interest rate spread (extra interest over a comparable government bond) for Tier II and Tier III bonds issued by standalone Primary Dealers (banks that trade government securities).
Now the Board of Directors can set the coupon rate (the bond’s interest payment) at any level they choose, based on market conditions and their own credit profile.
All other rules for issuing these subordinated (lower‑priority) bonds stay the same; nothing else has changed.
Banks that do Primary Dealer activities within their own organization must still follow the existing bank‑specific guidelines for subordinated debt.
How it plays out — a real example
Rohit, a senior bond officer at a Primary Dealer in Mumbai, looks at today’s government‑bond yield, talks with his team about the market’s appetite, and his board approves a coupon rate that is higher than the old 200‑basis‑point limit, feeling confident that the new RBI rule lets them price the bond exactly as the market demands.
What changed
Previously, the interest rate spread over comparable government security yields was capped at 200 basis points. RBI has now removed this ceiling, allowing Primary Dealers to set coupon rates as decided by their Boards. Other terms and conditions for issuing these bonds remain unchanged.
What it means for you
Primary Dealers gain greater flexibility to price their subordinated debt based on market conditions and their own credit profiles, potentially easing capital raising. This could lead to higher coupon rates for riskier issuers, impacting their cost of capital. Banks undertaking PD activities must still follow separate bank-specific guidelines.
What you must do
Review your Board-approved policy for issuing Tier II and Tier III bonds to align with the new flexibility.
Assess market conditions and your credit spread to determine appropriate coupon rates without the 200 bps cap.
Ensure compliance with all other unchanged terms and conditions for subordinated bond issuance.
If you are a bank doing PD activities departmentally, continue following extant bank-specific guidelines.
Does this circular apply to banks that have PD departments?
No. Banks undertaking PD activities departmentally must continue to follow the extant guidelines applicable to banks for issuing subordinated debt instruments.
Are any other conditions for issuing Tier II/III bonds changed?
No. Only the ceiling on interest rate spreads has been removed. All other terms and conditions prescribed earlier remain unchanged.
📜 Read the original circular — full text as issued by RBI
Please refer to our Master Circular RBI/2008-2009/71 IDMD.PDRS.02 / 03.64.00 / 2008-09 dated July 1, 2008 on Capital Adequacy Standards and Risk Management Guidelines for standalone Primary Dealers setting out, inter alia , guidelines on issuance of sub-ordinated debt instruments by Primary Dealers.
2. The existing guidelines on issue of subordinated debt stipulates that the interest rate spread of the instrument over the yield of comparable residual maturity of the Government of India dated security at the time of issue shall not exceed 200 basis points. On a review, it has been decided to remove the ceiling on the interest rate spreads at the time of issue of the subordinated instruments by the Primary Dealers under Tier II and Tier III capital requirements, with immediate effect. The Primary Dealers may, hereinafter, issue subordinated Tier II and Tier III bonds at coupon rates as decided by their Boards of Directors. Other terms and conditions prescribed in regard to issue of subordinated bonds, however, remain unchanged.
3. Banks undertaking PD activities departmentally may follow the extant guidelines applicable to banks in regard to issue of subordinated debt instruments.
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2008-09/424 · issued 01 Apr 2009. The plain-English explanation above is BankPulse’s own independent summary.
Example: if you are a Compliance officer at a bank this circular applies to (Standalone Primary Dealers, Banks undertaking PD activities departmentally), your first concrete step on “RBI removes interest rate spread cap on PD Tier II/III bonds” is: “Review your Board-approved policy for issuing Tier II and Tier III bonds to align with the new flexibility.” (RBI issued this 01 Apr 2009).
Circular: RBI/2008-09/424 -- RBI removes interest rate spread cap on PD Tier II/III bonds
Issued: 01 Apr 2009
Action required: Review your Board-approved policy for issuing Tier II and Tier III bonds to align with the new flexibility.
Action required: Assess market conditions and your credit spread to determine appropriate coupon rates without the 200 bps cap.
Action required: Ensure compliance with all other unchanged terms and conditions for subordinated bond issuance.
Action required: If you are a bank doing PD activities departmentally, continue following extant bank-specific guidelines.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 05 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=4913&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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