Indian Banks To Raise Up To $4.6b Via Share Sale To Counter Virus Shocks

Commercial banks such as IDFC First Bank, RBL Bank, Kotak Mahindra Bank, Bank of Baroda, Yes Bank and IndusInd Bank plan to raise at least ₹35,000 crore by selling shares as they seek to fortify themselves from covid-19-induced economic shocks.

The lenders expect the extra funds would go a long way to bolster their capital base and arrest any erosion in their capital adequacy.

There are widespread apprehensions that the countrywide suspension of businesses due to the more than month-long lockdown will result in borrowers finding it tough to repay loans, which may swell slippages and force lenders to go for higher provisioning and loan write-offs from the September quarter.

These banks have in the past few weeks drawn up plans to issue fresh shares, which will enhance their common equity tier 1 (CET 1) capital, a yardstick to assess a bank’s ability to provide for loan losses, write off loans and spend money on potential acquisitions or capital infusion plans.

Private lenders IDFC First Bank and RBL Bank plan to raise ₹1,800-2,000 crore each, said two people directly aware of the plans.

“The capital will be used by IDFC First Bank for strengthening the bank’s capital buffers further and for growth of the bank,” said the first person cited above, who declined to be named because of the price sensitive nature of the information.

IDFC First Bank’s CET 1 ratio has steadily declined from 15.27% in March 2019 to 13% at the end of March 2020. The capital adequacy ratio has deteriorated from 15.47% in March 2019 to around 13.28% at March-end 2020.

The regulatory requirement for the total CAR is 10.875% with CET-1 ratio at 8.875%.

Going by the trend, the bank is indeed in need of capital at the moment to continue providing for bad loans, which may further aggravate due to the ongoing lockdown and stagnation of businesses that may affect the borrower’s ability to repay loans.

RBL Bank is likely to raise funds primarily to add growth capital and strengthen capital position further.

“The capital raising may happen when the share price goes up. The money can be used for consolidation such as acquisitions or mergers, apart from improving the bank’s tier 1 capital further,” said a person close to RBL Bankand the second person cited above.

Shares of RBL Bank have plunged over 80% to ₹125.80 from ₹716.55 a year ago.

Mint reported on 28 April citing internal stress tests conducted by HDFC Bank Ltd and IndusInd Bank Ltd that bad loans could grow for domestic lenders due to the lockdown.

HDFC Bank expects up to a 50 basis points (bps) impact from probable stress in small business loans. IndusInd Bank has pegged the figure at a maximum of 80 bps. One basis point is one-hundredth of a percentage point.

This article was first published on livemint.com.