The Reserve Bank of India (RBI) has come out with guidelines on subordinated debt to retail investors on Wednesday. The central banks warned banks on several aspects while issuing the guidelines.

"The guidelines contained in the circular would be applicable with immediate effect," the RBI said.

RBI asked the banks to not use its fixed deposit rate as a benchmark for their floating rate instruments. The bank has asked the issuer to clearly explain the difference between a subordinated bond and a fixed deposit to the investor as deposit insurance does not cover the bond.

The guidelines also require the investors to declare that they have understood the terms of the specific issue. Banks issue Tier-II bonds to raise capital and Usually lower Tier-II bonds mature in
10 years while upper Tier-II debt matures in 15 years.

State Bank of India, the country's largest bank is planning to raise Rs 3,000 crore via retail bonds. Relating to the issue an SBI official said, "We are planning to raise Rs 3,000 crore via retail bond during the current fiscal. Apart from it, we are also planning to raise Rs 3,000 crore through few other instruments, but we are yet to finalise them."

Market experts more banks to follow SBI and raise capital by issuing long-term retail bonds. They also predict that the SBI's issue would be a success as there is enough demand in the market.