Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint

Investors find red on their ledgers as next wave of stress hits banks

  • Bank stocks plunge on worries of more stress from exposure to non-banking financial companies
  • Draft resolution plan by DHFL disappoints as investors fear large haircuts for lenders

Investors were rudely reminded on Monday that the country’s banks have a second wave of stress and bad loans coming at them. And, this wave will likely emerge from non-banking financial companies (NBFCs).

A resolution plan submitted by a housing finance company to banks fell short of market expectations, while another was dragged to court for allegedly misappropriating funds.

Since banks have lent 6.4 trillion to NBFCs as of July end, it was not surprising that banking stocks came under severe pressure.

Ergo, the Nifty Bank index fell more than 2%, while smaller banks, such as RBL Bank Ltd, lost over 10% on Monday. “Two factors, the resolution plan by DHFL and what is happening with Indiabulls Housing Finance was the reason behind why bank stocks fell today," said an analyst, asking not to be named. DHFL is Dewan Housing Finance Corp. Ltd.

Of course, the damage to HFCs, especially Indiabulls Housing, was even more. It fell 34% on Monday after the Reserve Bank of India (RBI) placed the firm’s intended merger target Lakshmi Vilas Bank Ltd under prompt corrective action (PCA). In April, Indiabulls announced the merger with Lakshmi Vilas in an all-share deal. The Economic Times reported that RBI has not given a green signal to the merger. But Gagan Banga, vice chairman and MD of Indiabulls Housing Finance, presented his company as a rescuer of the bank and said that he is hopeful the merger process would be completed within the fiscal year. “We are hopeful to hear from RBI within a month," said Banga in a conference call with investors post market hours on Monday. He added that for a bank under PCA, a merger with a large balance sheet would provide the necessary capital.

And there are other troubles brewing for the housing financier. A Delhi high court bench has issued notices to regulators seeking their response in a public interest litigation filed earlier this month.

Considering that many banks have lent to Indiabulls Housing Finance, the malaise in the stock soon spread to bank shares.

Meanwhile, DHFL submitted its draft resolution plan on Friday to lenders, which doesn’t seem to have impressed the market. Investors fear the haircuts to banks will be large and the debt-equity conversion proposed is expensive. DHFL’s shares dropped over 8% in reaction to the plan.

Indian banks had a short-lived relief in the first quarter, when their bad loan pile shrank. However, new stress has emerged ever since, and analysts at Jefferies India Pvt. Ltd said that close to 1.6 trillion of bad loans would be added. “Not small, but not large enough to disarray the banking system," the brokerage firm said in a note dated 24 September.

Stress is around the corner again. It remains to be seen which banks would ride this one out without any bruises.

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