Both banks are offering rates which are well below the coupon rates being offered by ICICI and the Industrial Development Bank of India on their "on tap" issues.

While Canara Bank will tap the market with a 63-month paper pegged at a coupon 13.85 per cent, the 87-month paper has been priced at 14.20 per cent. PNB, which is entering the market with a 75-month paper, has pegged the coupon at 13.75 per cent, but it will offer various incentives which will take the yield of the paper to 13.89 per cent. The PNB issue will open on January 5 while the Canara Bank issue will open on January 8.

Merchant bankers to the issues said that the issues will go through even though they are priced below the debt papers being offered by financialinstitutions which are rated AAA (triple A). "Banks will never face a problem as one bank will always help the debt issue being issued by the other bank," a source said.

Vijaya Bank, which kicked off the subordinated debt issues by public sector banks on December 28 when it entered the debt market with a 14.20 per cent paper, successfully raised Rs 120 crore. The tenure of the paper was 63 months and the interest rate offered was on an annual basis.

Canara Bank and PNB will be followed by Central Bank, Bank of India, Indian Overseas Bank and Syndicate Bank. These banks will have to tap the debt market to meet their CAR for the financial year.

The Bangalore-based Canara Bank and the Delhi-based PNB's issues are being managed by ICICI-Securities, SBI Capital Markets, JM Financial and DSP Merrill Lynch. Sources said that the papers are unrated.

Earlier, the Reserve Bank capped the maximum coupon that commerical banks can offer while raising subordinated debt to shore up the tier-II capital. The centralbank 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, the maximum coupon rate that it can offer is at 14-14.05 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 Canara Bank issue has been priced at above a spread of 200 basis points since it found the cap very tight," a merchant banking source said.

RBI officials had earlier clarified that they are willing to relax the cap on a case-to-case basis. PNB has capped it within the limit, but is offering various incentives to graded investors. In effect, the yield on the PNB paper works out to a maximum of 13.96 per cent and a minimum of 13.89 per cent.

The need to shore up tier-II capital followsthe 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.