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Finance

Indian banks build $13bn war chest to battle bad loans

RBI asks lenders for preemptive fundraising as first recession in 41 years looms

Bank employees wait for customers at a loan fair in New Delhi in October 2019. Hit by pandemic, Indian banks are bolstering capital buffers to weather the increase in bad loans.   © Reuters

MUMBAI -- India's financial institutions are on a fundraising spree via debt instruments and equity offerings, as the new coronavirus pandemic threatens to turn loans into instruments of economic destruction.

The ratio of nonperforming assets to total advances could soar to over 12.5% by March 2021 from 8.5% as of end-March this year, prompting the country's central bank to push banks to raise reserve capital, which now totals over 1 trillion rupees ($13.4 billion).

India is expected to fall into a recession this fiscal year due to the coronavirus, which has affected over 2.3 million people and caused 46,000 deaths in the country. This would be India's first recession since 1979.

The latest bank to join the fundraising spree is Axis Bank which on Tuesday said it had raised 100 billion rupees by issuing shares to qualified institutional buyers at a price of 420.1 rupees apiece.

On the same day, mortgage lender HDFC closed a deal to raise up to 140 billion rupees via debentures, warrants and shares. The country's largest private sector bank ICICI Bank also floated its 150 billion-rupee funding on Monday.

Reserve Bank of India Gov. Shaktikanta Das advised banks in early July to raise reserves as the pandemic and subsequent lockdown could result in more defaults, eroding banks' cash balances.

"[I]t has become a lot more important that banks have to improve their governance [and] sharpen risk management skills. Banks have to raise capital on an anticipatory basis instead of waiting for a situation to arise," Das said at an industry event. "It is necessary for both public and private-sector banks to build up adequate capital buffers," he added.

A few days after his remarks, State Bank of India -- India's largest lender -- announced it would raise 250 billion rupees to maintain its capital requirement.

Indian banks have been tested over the past few years after the RBI forced them to review their assets under stricter criteria that eventually resulted in a surge in bad loans. To add to their woes, borrowing has also slowed. These stressors are more apparent in state-run banks than in the private sector.

According to India Ratings principal economist Sunil Kumar, two relatively recent events have slammed all banks: the financial company crisis triggered by the fall of Infrastructure Leasing & Financial Services in October 2018 and the ongoing pandemic. "[Both] will be reflected in balance sheets very soon," Sinha said. Public sector banks were especially vulnerable to nonperforming assets, he noted.

In its semiannual Financial Stability Report on July 24, RBI warned that nonperforming assets in the banking sector would rise to 12.5% of total advances by March 2021 and could hit 14.7% under severe circumstances. Former RBI Gov. Raghuram Rajan also warned of "unprecedented [high] levels" of troubled loans in the next six months.

"The banks' exposure to stressed sectors, loan-loss cover and pre-provision earnings determine the urgency of their capital requirements, which is more pronounced for state banks," wrote Saswata Guha, a director at Fitch Ratings, in a recent note.

Still, the Indian government has not said whether it will pour further capital into public-sector banks. Over the last five years until March 2020, India has pumped around 3 trillion rupees into banks to maintain capital requirements.

"We believe the state banks' proposed capital raising from private sources is not going to be enough to fully mitigate anticipated risks," Guha said. "The state has not announced anything so far, but we expect some infusions eventually to support the banks' capital-raising initiatives."

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