"If you sweat more during peace, you will bleed less during the war". Indian banks and NBFCs have acknowledged that there is a war coming. The lockdown due to COVID-19 has strangled an already ailing economy. Businesses are slowly shutting down, projects are being delayed and if the situation doesn't improve many small businesses will not survive beyond 2020. This will severely affect supply chains which would put stress on all the remaining businesses as well. This scenario creates a strong possibility of a lot of loans provided by these banks going bad. These lenders are therefore lining up to raise as much money as they can get their hands on, so they can mitigate any liquidity problems that will arise from such a situation.
Six banks have already raised Rs.52000 crore. ICICI Bank and Yes Bank were the each raised Rs.15,000 crore, while Axis Bank came in third by raising Rs.10000 crore so far. However, SBI raised plans on raising Rs 20,000 crore. This is a good time to raise funds from markets as it will be very difficult to raise money when things turn from bad to worse.
RBI governor Shaktikanta Das has expressed his view that recapitalisation of these banks right now is vital as he expects much higher Non-Performing Assets (NPAs) and capital erosion. RBI found that the banking sector’s gross bad-loan ratio may rise from 8.5 per cent in March 2020 to anywhere between 12.5 to 14.7 per cent by March 2021 under its baseline to the worst-case scenario. Public sector banks may require Rs.45,000 Cr. in FY21 to maintain their Tier-l capital while private banks may require around Rs.25000 for the same.
Anyways, if the worst-case scenario does not play out, then the banks can use this capital to explore faster growth. So it is a mix of defensive and offensive approach.
Key Takeaways:
Banks stockpiling their balance sheet is a huge indicator of things to come. Worst case scenario might not play out at all but the Central bank does expect conditions to deteriorate if the situation continues at the same rate. RBI certainly does not want COVID-19 to cripple banks already struggling with high NPAs.
This is a #Teji move as it indicates that lenders are diligent and are moving fast to create a proper cushion. It has a dual advantage as if the businesses are normalized again it can use the capital to fund growth instead.
