Indian lenders like SBI, Axis Bank and others need $20 billion in capital— most of it will go into filling up NPA holes
- Credit Suisse estimates that Indian banks will shore up $20 billion in capital to meet the demands of their debt.
- Kotak Mahindra Bank already on the ball with a QIP worth ₹7,100 crore ($940 million) announced today.
- Axis Bank is also reportedly in talks with Carlyle to raise $1 billion in funding.
Credit Suisse estimated that Indian banks will need to shore up nearly $20 billion in capital to hedge against upcoming risks as the coronavirus pandemic continues to bear heavily on the economy. More than half of the requirement, an estimated $13 billion, is going be from public sector banks, according to the investment bank.
“We estimate that 70% of the Indian financial system’s lending capacity is now constrained,” the report said estimating that 25% of the credit lies with public sector banks — excluding the State Bank of India (SBI) — are is yet to be free of the prior burden of non-performing assets (NPAs).
Banks need money to repay about $2.9 billion worth bonds that are up for repayment in the next 12 months. “We estimate ₹2.5 trillion ($33 million) of debt is already downgraded to ratings that are likely to make refinancing challenging,” the financial services company said in its report.
Kotak Mahindra Bank launches its QIP
Kotak Mahindra Bank is already on the ball with the launch of its ₹7,100 crore ($940 million) qualified institutional placement ( QIP). This allows the private lender to raise capital from domestic markets without the need to submit at pre-issue filings with the market regulator, the Securities and Exchange Board of India (SEBI).
The equity shares will be issued at a discount of 5% on the floor price, which is close to ₹1,148 per share. Kotak Mahindra Bank's share price rallied by more than 5% on May 27.
Axis Bank is looking to raise $1 billion
Another private player, Axis Bank, is also looking to raise $1 billion to private equity firm Carlyle, according to PTI. “The brass seems to be warming up to the idea of another deep-pocket marquee investor in recent weeks,” a source told the publication. An investment of this size will be that Carlyle will own between 5% to 8% stake in Axis Bank. Its share price jumped by over 13% on May 27.
IndusInd Bank’s Hinduja family wants to raise its stake
Simultaneously, IndusInd Bank is reportedly in talks with Japan’s Nippon Life to battle the growing threat of bad loans and ratings downgrades. Like Uday Kotak, the owners of IndusInd Bank — the Hinduja family — is also looking to increase their stake to 26% instead of the RBI’s mandated 15% in this time of crisis. Following in the steps of other banks, IndusInd Bank's share price was up by 5.8% on May 27.
Smaller players like RBL Bank, AU Small Finance Bank, IDFC First, Yes Banks and others are also looking to go down the QIP-route for undisclosed amounts to raise capital and shore up their balance sheets. They account for 8% of the credit in the Indian financial system and have been bearing the brunt of deposit outflows and liquidity constraints, according to Credit Suisse.
It’s not just banks
Banks are only a part of the liquidity crunch in the economy. Non-banking financing companies (NBFCs) have been pulling back on credit since the IL&FS crisis of 2018. And, with mutual funds now frowning upon investing in NBFCs, they now have limited access to funding from the domestic debt market, according to Credit Suisse. “Asset Liability Management (ALM) challenges for NBFCs are turning more severe with access to funding differentiated and a 6-month moratorium on 30% to 70% of loans,” said the report.
Even though the Indian government announced multiple measures to try and help the sector, the benefits are likely to be limited. “The government has announced a ₹300 billion special liquidity window for purchasing the securities of NBFCs. However, the scheme is for short-term paper, and available to investment grade entities, which impacts its effectiveness,” said Credit Suisse.
“Our analysis shows that around ₹640 billion of borrowings for 'AA'-and-below-rated NBFCs are coming up for refinancing from April to December 2020,” it added, pointing out that sell-downs and external commercial borrowings (ECBs) are now the key avenues for them to meet their refinancing needs.
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