Mumbai: ICICI Bank Ltd has drawn up a plan to raise as much as 25,000 crore for on-lending as India’s second largest private lender seeks to fill in the vacuum left by non-banking financial companies (NBFCs), which are facing a liquidity squeeze. ICICI Bank intends to issue non-convertible debentures (NCDs) and other fixed-income securities for raising funds in the year ahead, according to a document sent recently to shareholders after its annual general meeting.

in that document, ICICI Bank its board has been authorized through a general resolution to borrow the funds by way of issuance of non-convertible securities, including but not limited to bonds, and NCDs in one or more tranches on a private placement basis.

A spokesperson for ICICI Bank did not respond to an emailed query.

The lender’s move is aimed at capitalizing on the growing opportunity to deploy more money towards road, power and infrastructure projects, a space that has been hitherto dominated by NBFCs.

NBFCs began to face a funding crisis because of a liquidity squeeze that surfaced following defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) and DSP Mutual Fund sold commercial papers worth around 300 crore of housing finance firm DHFL at higher yields in September.

Banking industry experts said ICICI Bank’s step is a well-thought out one as it comes at an opportune time when NBFCs are finding it tough to borrow money from banks and mutual funds.

“This appears to be a sensible move by ICICI Bank to secure shareholder approval for this enabling resolution to raise capital. In an environment where NBFCs are facing liquidity issues and deployment opportunities are beginning to emerge, there is an opportunity for well-capitalized banks to raise debt at attractive rates and deploy it comfortably in retail as well as wholesale projects," said Krishnan A.S.V., lead analyst for banking and financial services at SBICAP Securities Ltd.

“With NBFCs slowing their pace of disbursements, banks are also benefited by a conducive pricing environment with asset yields likely to reflect a gradual return of banks’ pricing power. ICICI Bank has a strong deposit franchise and should find it relatively easier to raise up to 25,000 crore as tier-II capital," he said.

UBS Securities in a September report predicted tighter liquidity conditions can translate into lower growth and margins for NBFCs going ahead. A reversal in liquidity could imply that funding for NBFCs may remain tight going forward, the financial services firm said. “….They are likely to see lower growth and/or margins ahead," said Gautam Chhaochharia, head of research, India at UBS Securities. This is where lenders like ICICI Bank are seeing an opportunity. “Private banks like ICICI Bank and HDFC Bank would be key beneficiaries due to shift in borrowing profile for NBFCs," said Jignesh Shial, Kushan Parikh and Himanshu Taluja of Emkay Global in a September report.

Suresh Ganapathy, head of financial sector research at Macquarie, said NBFCs are facing troubles in terms of borrowing money and deploying them, but banks are still fine in the market. “A large part of this money could be used for helping the lending businesses of ICICI Bank’s international operations. The market is vibrant enough for the bank to raise this kind of capital through bonds or NCDs," said Ganapathy.

NBFCs, typically, raise funds either from banks or mutual funds. Banks typically finance up to 60% of NBFC’s fund needs while about 30-35% comes from fixed income mutual funds. In the last one-and-a-half years, NBFCs have been increasingly approaching mutual funds for their funding requirements because banks have tightened their lending to NBFCs as their own non-performing assets grew.

NBFCs are also facing refinancing risks with their commercial papers (CPs) and NCDs set to mature before the end of this financial year. Papers worth about 78,380 crore of various debt mutual fund schemes, are pending redemption between October and March.

Rating agencies and research analysts have been painting a bleak outlook for the 28.4 trillion industry of NBFCs and home financiers, which led to sharp decline in stocks of NBFCs. This crisis for NBFCs has created a new business avenue for bank, especially in lending to large infrastructure projects.

Brokerage Emkay Global said that 12% of DHFL’s liabilities is maturing in three months against 9% of its total assets.

Cholamandalam Finance has 15% liabilities maturing in three months against 7% of its total assets. Shriram Transport faces a similar issue.

In June, rating agency Icra Ltd estimated that retail-focused NBFCs—with an estimated portfolio size of 7.5 trillion—will need 3.8-4 trillion of fresh debt funding in FY2019 to support their envisaged portfolio growth of about 20% in FY2019.

“About 50% NCDs and CPs of NBFC borrowings were largely at a fixed rate, while 35-37% of bank borrowings get repriced on a quarterly or annual basis. As the share of bank borrowings begins to increase from Q2 FY2018 and borrowings with annual reset dates are expected to get repriced from August-September, retail NBFCs are expected to face increased pricing pressure in the second half of FY2019," said Icra.

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