Indian Lenders Line Up Over Rs 1 Lakh Crore In Capital-Raising Plans
Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)  

Indian Lenders Line Up Over Rs 1 Lakh Crore In Capital-Raising Plans

Indian banks have concluded or approved over Rs 1 lakh crore in equity fundraising as they attempt to hunker down for a period that could bring a rise in bad loans and increase in provisions.

The Covid-19 crisis is seen pushing the Indian economy into recession in FY21, which would raise the risk of delinquencies. To ensure that banks remain well capitalised, Reserve Bank of India Governor Shaktikanta Das on Saturday asked lenders to raise capital preemptively. Das said the regulator had asked banks starting mid-June to conduct stress tests on their portfolios and take corrective measures.

“The economic impact of the pandemic—due to the lockdown and anticipated post-lockdown compression in economic growth—may result in higher non-performing assets and capital erosion of banks. A recapitalisation plan for PSBs (public sector) and private banks has, therefore, become necessary,” the RBI governor said.

Private Banks Get A Head Start

So far, private and public sector banks have announced over Rs 1 lakh crore in capital raising, according to a July 8 report by Jefferies. Much of this has come from private sector banks—using a mix of private placements, rights issues and follow-on public offers to raise the funds.

Two banks—Kotak Mahindra Bank Ltd. and IDFC First Bank Ltd. — have concluded fundraising. Others, including Axis Bank Ltd. and ICICI Bank Ltd., have taken board approval. Yes Bank Ltd. will open a follow-on public issue on July 15.

"We believe that capital raising plans reflect a combination of defensive and offensive approaches," Jefferies said.

The defensive approach stems from uncertainty in the environment, reflecting a high level of moratorium taken by borrowers, the strength of the economic recovery, and any future liquidity stress. Simultaneously, lenders are hoping that, toward 3Q FY21, the environment will have normalised, allowing them to explore faster growth via market share gains.
Jefferies Report

PSU Banks To Follow

Among government-owned lenders, three have so far have announced plans to raise equity capital.

The board of State Bank of India is expected to meet this week to consider raising funds via additional tier-1 bonds in U.S. dollars of Indian rupees, it said in a notification last week. Bank of Baroda, Punjab National Bank and Canara Bank have announced an intention to tap the markets for equity capital.

There is, however, no indication from the government yet as to whether it will invest further funds in public sector banks. Over the five years between 2015-16 and 2019-20, the government has infused a total of Rs 3.08 lakh crore in public sector banks, he said in his speech.

The capital adequacy ratio of public sector banks improved from 12.2% in March 2019 to 13% in March 2020.

NBFCs Also In Line

Non-bank lenders, including housing financiers, may also join the queue to raise capital.

Shriram Transport Finance Ltd., M&M Financial Services Ltd., PNB Housing Finance, JM Financial are among those that have indicated or completed fund raising.

More To Come...

The pipeline for bank fundraising may continue to swell with the RBI asking lenders to raise capital preemptively.

Analysts, too, have been anticipating a large quantum of fundraising from the financial sector. In a note on July 1, Fitch Ratings said Indian banks are likely to require at least $15 billion in fresh capital to meet a 10% weighted-average common equity Tier-1 ratio under a moderate stress scenario. “This rises to about $58 billion in a high-stress situation where the domestic economy fails to recover from the coronavirus pandemic-related disruption."

PSU banks will require the bulk of the recapitalisation, as the risk of capital erosion at state banks is significantly higher than for their privately owned peers, said Fitch, adding this recapitalisation may come in FY22 as the RBI permitted moratorium will delay the recognition of bad loans.

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