Indian banks are raising nearly Rs 69,000 crore in equity capital in the current financial year, making it the highest equity raising from lenders in recent times. The fund raising includes money raised via qualified institutional placements and preferential allotments. It also includes recently announced fund raising plans which are yet to be completed.
Data sourced from Prime Database shows that banks have raised Rs 33,248 crore through QIP issues till date. The funds raised through this route alone are higher than in the last five years, the data shows.
In addition to QIP issues, at least two large private banks are raising capital through preferential issues. On Wednesday, the board of HDFC Bank Ltd. approved raising of Rs 24,000 crore. This would be done through a mix of instruments, including an issue of securities to its parent HDFC Ltd. In November, Axis Bank Ltd. approved Rs 11,626 crore in capital raising via issue of shares to investors including Bain Capital.
The fund raising comes at a time when the banking sector is hoping for a pick-up in credit growth and a revival in the economy. It also comes against the backdrop of a perceived change in the credit culture, where the newly instituted Insolvency and Bankruptcy Code is likely to strengthen the ability of lenders to recover their dues.
This could allow banks to go into the new credit cycle, when it starts, with greater confidence.
Backed by the recent fund raising, most private banks now have capital adequacy ratios well above the minimum regulatory requirement. Kotak Mahindra Bank Ltd. has a capital adequacy ratio of 18.36 percent, while ICICI Bank Ltd. has a capital adequacy ratio of 17.69 percent. HDFC Bank, before Wednesday’s fund raising announcement, had a capital ratio of 15.1 percent.
Apart from the larger private banks, smaller private lenders and a handful of state-owned lenders have also managed to raise equity capital this year.
Among public sector banks, State Bank of India raised Rs 15,000 crore through a QIP issue in June. Punjab National Bank and Union Bank of India raised Rs 7,000 crore via QIP issues last week. Syndicate Bank raised Rs 1,150 crore through an issue which closed on December 15.
According to Moody’s Investors Service, the capital raise will add about 100 basis points to PNB’s Common Equity Tier 1 (CET-1) ratio, which was 8.1 percent as of September 2017. Union Bank of India and Syndicate Bank will add 60-70 basis points each to their CET-1 ratios, which were 7.0 percent and 7.2 percent, respectively, as of September 2017.
Other state-owned lenders like Bank of Baroda, Bank of India, Allahabad Bank and Andhra Bank have also lined up share sale offers and have board approvals in place. They are yet to finalise the timing of the fund raising.
Conclusion of recent capital raising plans by state-owned banks, in particular, signals improved access to the equity capital markets and will reduce dependence on government capital, said rating agency Moody’s Investors Service in a note on Tuesday. The inability of most public sector banks to access the equity markets has been a key capital constraint, Moody’s added.
Finance Minister Arun Jaitley in October had announced a Rs 2.11 lakh crore two-year recapitalisation plan to strengthen public sector banks, which have restricted lending due to asset quality pressures. Gross bad loans across all listed banks rose to Rs 8.4 lakh crore as of September 2017, following an asset quality review conducted by the Reserve Bank of India in 2015.
The capital raised by both public and private sector banks will mostly go towards provisioning against bad loans, and loan growth. It will also come in handy to meet requirements under the new International Financial Reporting Standards rules which kick-in starting next fiscal year.
“Private sector banks are building war chests for the growth that they can see,” said Saswata Guha, director of financial institutions at Fitch Ratings India. However, since the majority of the capital raising has been done towards the fag end of Basel III norms, most of it will be consumed by risk, Guha said.