Indian Lenders May Need $20 Billion In Extra Capital, Estimates Credit Suisse

Indian banks may see a rising need for capital as credit quality of borrowers weakens, leading to a jump in credit costs.

Credit Suisse estimates the need for additional capital at $20 billion (about Rs 1.5 lakh crore) over the next 12 months, it said in a report on Wednesday. Of this, public sector banks will need $13 billion (about Rs 97,500 crore) in recapitalisation from the government, the research house estimates.

“We raise our credit cost estimates by 20-60% given the lockdown extensions and unimpressive fiscal stimulus. Private banks tier-1 is healthy at 13%, and coupled with strong pre-provisioning profitability, adequate to absorb up to 4% additional credit costs,” said Ashish Gupta, head of equity research at Credit Suisse. “We, however, expect them to shore up capital buffers and estimate $20 billion in capital-raising by Indian banks in the next 12 months.”

Some private lenders are already seeking to raise capital. On Tuesday, Kotak Mahindra Bank launched a qualified institutional placement issue. Smaller lenders IDFC First Bank Ltd. and RBL Bank Ltd. have also raised fresh funding. On Wednesday, Economic Times reported that Axis Bank Ltd. may also look to raise $1 billion from private equity firm Carlyle. A few others such as ICICI Bank Ltd. and State Bank of India have the space to raise capital via equity sales in subsidiaries, Credit Suisse said.

Refinancing Risk From ‘Fallen Angels’

The need for additional capital emerges from the already deteriorating asset quality, which is likely to worsen due to the economic slump brought on by the Covid-19 crisis. The Indian economy is set to contract by as much as 5 percent in real terms in 2020-21, forecasters such as Crisil, Goldman Sachs and Nomura said.

Rising risk aversion and the accelerating pace of ratings downgrades will add to the Indian banks asset quality stress. “We estimate Rs 2.5 lakh crore of debt has already been downgraded to ratings that are likely to make refinancing challenging. These fallen angels have Rs 22,000 crore of bond repayments due in the next 12 months,” Gupta said.

Despite easy liquidity, banks are turning more risk averse and over the past 12 months 90%-plus of their incremental lending has gone to corporates rated A or above. At the same time, bond markets have turned increasingly selective, the research house said.

70% Of Financial System Constrained

For non-bank lenders, asset-liability management challenges are turning more severe with 30-70% of loans under moratorium and access to funding “differentiated.” The securitisation and ECB market that was a large source of liquidity in the past 18 months has also dried up and balance sheet liquidity will be key to avoiding default, Credit Suisse said.