SBI, ICICI Bank, Axis, Kotak and others have plans to raise $14 billion — but if things go haywire, they could need three times more

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  • Indian banks on the hunt for capital having raised $7 billion so far with plans to bring in another $7 billion in the coming days.
  • Analysts estimate that in the worst-case scenario, Indian banks will needs nearly three-time that amount.
  • The level of bad loans in the Indian banking industry is expected to increase once the Reserve Bank of India's (RBI) moratorium comes to an end on August 31.
Banks in India have raised around ₹52 crore ($7 billion) in funds so far and have plans to raise another ₹52 crore in the coming days. Public and private banks alike are shoring up capital as the economy fears a fresh cycle of bad loans resulting from the coronavirus pandemic.

However, analysts have earlier estimated that the true requirement for banks if things go south may actually be up to $50 billion — more than three times what’s currently on the docket.

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“All Indian banks, including private-sector ones, will face capital erosion in the high-stress scenario envisaged by the rating agency, but PSBs are the most vulnerable,” said a report by Fitch Ratings dated July 28.

Funds raised by Indian banks so far:

BankFundsFundraising method
ICICI Bank₹ 15,000 crore QIP
Yes Bank₹ 15,000 croreFPO
Axis Bank₹ 10,000 crore QIP’
Kotak Mahindra Bank₹ 7,422QIP
IndusInd Bank₹ 3,288Preferential issue
IDFC First Bank₹ 2,000Preferential issue

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Funds to be raised in the future by Indian banks:

BankFundsFundraising method
State Bank of India₹ 20,000 croreEquity
Bank of Baroda₹ 13,500 croreEquity and debt
Canara Bank₹ 8,000 croreEquity and debt
PNB₹ 7,000 croreEquity
Federal Bank₹ 4,000 crore Equity

Why do Indian banks need capital?
The Reserve Bank of India (RBI) may have delayed the onslaught of bad loans by putting a six-month moratorium on loan repayments in place, but that is set to end on August 31. The more bad loans the bank has, the more capital it will need to cover the risk.

“The levels of NPA will be unprecedented six months from now,” said former RBI governor Raghuram Rajan in July.

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Every bank takes in deposits but only makes money by giving out loans through interest. Loans come with a certain amount of risk, which is why banks have to keep some amount of money in the kitty to cover the risk. The level of capital that is required depends on the classification of the loan. When it comes to non-performing assets (NPAs), the provisioning requirement balloons to 15% as per RBI’s guidelines.

So, the more bad loans there are, the more money the bank needs to have in liquid form. While that may sound simple enough, the problem lies in the fact that provisions put aside to maintain the capital adequacy ratio of the bank can’t be given out at loans. This restricts the bank’s ability to make more money.

Furthermore, if bad loans cross a certain threshold, banks may not have enough capital to cover the minimum risk requirement.

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The RBI’s own stress tests found that the gross ratio of bad loans may jump from 8.5% as of March 2020 to anywhere between 12.5% to 14.7% in the next nine months.

On the flip side, if all goes well, Indian banks will have enough in their coffers to put new growth plans into play. Last week, during the Monetary Policy Meeting, governor Shaktikanta Das also addressed the industry’s call for a one-time restructuring of all loans under an Expert Committee that will be led by KV Kamath that may help keep bad loans at bay.

It’s not just Indian banks but banks around the world that are hungry for capital right now. In the US, the Federal Reserve has increased capital requirements for large banks on August 12 so that they have enough of a buffer to absorb any significant losses. Federal Reserve Bank of Minneapolis President Neel Kashkari believes that US banks will need at least $200 billion in capital to survive the economic downturn.

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SEE ALSO:
India's pile of bad loans could be at least 1.5 times bigger in the next 9 months

Indian banks have made $3.1 billion just by parking funds with the RBI — instead of giving them out as loans