Banks look to raise funds as uncertainty prevails
Lenders set to raise capital by tapping equity markets or through debt instrumentsExperts had predicted that Indian banks will need to more capital to tide over the covid-19-led crisis
Lenders are making a beeline to raise capital and prepare for adversities in a year of expected low credit growth amid the uncertainties over how the covid-19 situation will unfold and affect asset quality.
Banks said they will raise capital by tapping the equity markets or through debt instruments. 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, while State Bank of India (SBI) said on 16 June that it plans to raise ₹20,000 crore of equity capital in FY21.
There is a surge in the number of banks and other financial institutions hitting the market for capital, but institutional investors are seeking additional safeguards, said a person, requesting anonymity. “There is a lot of uncertainty in the market and investors are willing to wait before committing funds. This will, however, not be a problem for large banks with better asset quality."
Experts had predicted that Indian banks will need to more capital to tide over the covid-19-led crisis. Rating agency Icra said in a note on 4 June that public sector banks (PSBs) will require between ₹45,000 crore and ₹82,500 crore of capital in FY21 as the covid-19 pandemic is expected to increase asset quality pressures.
The capital requirements for PSBs was earlier estimated at ₹10,000-20,000 crore for FY21 and the Centre had expected them to raise capital from markets, with expectations of improved asset quality and profitability, said Icra.
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. Kotak Mahindra Bank raised ₹7,442.5 crore in May and IDFC First Bank raised ₹2,000 crore in June.
PSBs have been at the forefront of credit delivery to various sectors, including small businesses, during the pandemic. The government has not budgeted any capital infusion for the lenders in FY21. Private sector banks will need to raise ₹25,000-48,300 crore over FY21 and FY22, Icra added.
“We expect capital raising by Indian banks as they look to shore up capital buffers," Credit Suisse said in a report on 26 May, adding that for PSBs, while capital levels are above regulatory thresholds, at 9-11%, but given the low profitability, the ability to absorb credit cost is 200 bps.
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