Vijaya Bank will be followed by Punjab National Bank, Canara Bank, Central Bank, Bank of India, Indian Overseas Bank and Syndicate Bank. These banks will have to tap the debt market to meet their capital adequacy ratios (CAR) in the current financial year.

The Bangalore-based bank's issue is being managed by ICICI Securities, SBI Capital Markets, JM Financial, DSP Merrill Lynch and Kotak Mahindra. Sources said that the paper was unrated and will be listed at the stock exchanges.

Merchant banking sources said that the issue had been aggressively priced and the bank is likely to get the entire amount in one day. "The issue will go through in one day," a source handling the issue said. Sources indicated that banks are more than willingto buy the debt paper.

The banks that will follow Vijaya include Punjab National Bank at Rs 300-400 crore, Canara Bank Rs 600-700 crore, Central Bank Rs 450 crore, Bank of India around Rs 1,000 crore and Syndicate Bank around Rs 80 crore.

Earlier, the Reserve Bank of India capped the maximum coupon that commerical banks can offer while raising subordinated debt to shore up tier-II capital. The central bank has said that banks are allowed to raise tier-II capital at a maximum spread of 200 basis points over the government of India paper of a comparable maturity.

This effectively means that a bank seeking to raise a seven-year debt paper to increase its tier-II capital can offer a maximum coupon rate between 14 per cent and 14.05 per cent. The primary coupon rate for the five-year government paper is pegged at 11.78 per cent and the six-year paper at 11.98 per cent. No seven-year paper was issued in the current fiscal.

"The Vijaya Bank issue has been priced above a spread of 200 basis points since itfound the cap very tight," a source said. RBI officials had earlier clarified that they are willing to relax the cap on a case-to-case basis.

The need to shore up tier-II capital follows the RBI decision to hike banks' capital adequacy ratio (CAR) in stages -- from 8 per cent to 9 per cent by March 1999 and eventually to 10 per cent by March 2000. A number of banks are expected to hit the debt market to raise the CAR through shoring up tier-II capital.