MUMBAI: As uncertainty prevails over how the pandemic will unfold and affect asset quality, lenders are making a beeline to raise capital, preparing for adversities in a year of expected low credit growth.
Banks, large and small, have announced they will raise capital by tapping equity markets or through debt instruments. For instance, private sector lender HDFC Bank said on 20 June that it has received board approval to raise up to ₹50,000 crore in the next 12 months by issuing debt securities. India’s largest bank State Bank of India (SBI) said on 16 June that it plans to raise ₹20,000 crore of equity capital in FY21.
A person aware of the development said while there has been a surge in banks and other financial institutions hitting the market for capital, institutional investors have been seeking additional safeguards.
“There is a lot of uncertainty in the market and investors are willing to wait before they commit to more funds. This will, however, not be a problem for large banks with better asset quality," said the person cited above.
Experts had forecast that Indian banks will need to raise capital to tide over the covid-19 pandemic. Rating agency Icra, in a note on 4 June, said public sector banks will require ₹45,000- ₹82,500 crore of capital in FY21 as the pandemic is expected to increase asset quality pressures. According to Icra, with earlier expectations of improved asset quality and profitability, the capital requirements for public sector banks (PSBs) was estimated at ₹10,000-20,000 crore for FY21 and the government had expected PSBs to raise capital from markets.
Mint had reported on 30 April that IDFC First Bank, RBL Bank, Kotak Mahindra Bank, Bank of Baroda, Yes Bank, and IndusInd Bank plan to raise at least ₹35,000 crore in equity capital. Of these, IDFC First Bank raised ₹2,000 crore in June and Kotak Mahindra Bank raised ₹7,442.5 crore in May.
Although public sector banks have been at the forefront of credit delivery to various sectors, including small businesses during the pandemic, the government has not budgeted for any capital infusion into these lenders in FY21.
Icra also estimated that private sector banks will need to raise anywhere between ₹25,000-48,300 crore over FY21 and FY22.
“We expect capital raising by Indian banks as they look to shore up capital buffers," Credit Suisse said in a report on 26 May.
For public sector banks, while capital levels are above the regulatory thresholds at 9-11%, but given low profitability, the ability to absorb credit cost is only 200 basis points, Credit Suisse had said.
Mint reported on 23 June that lenders are also divesting their stake in insurance subsidiaries to raise capital. While ICICI Bank raised ₹840 crore and ₹2,250 crore by selling stakes in life and general insurance companies, respectively, SBI sold a 2.1% stake in its life insurance subsidiary.
Another private sector lender Yes Bank has an approval to raise up to ₹15,000 crore in FY21 and its chief executive Prashant Kumar had told Mint in an interview last month that the bank will be comfortably placed for three years if it raises all of it.
Experts also said the amount of capital raise will be contingent upon the slippage rate from the loans under moratorium. Despite credit growth estimated to be in low single digits in FY21, banks will need to bolster their capital ratios for covid-19 costs.
The Credit Suisse report, cited earlier, had pointed out that larger private banks have disclosed that 15-40% of their loans are under moratorium, and for public sector and smaller private banks it stood at 35-75%.
“Banks have made provisions in excess of RBI requirements, at 0.5-2.0% of loans under moratorium (0.2-0.5% of overall loans). However, these are unlikely to suffice and we expect slippages and credit costs to be elevated in FY21," the report said.
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