More capital raises by banks likely as NPAs set to surge

The financial sector is bracing for an increase in the number of fundraising programmes by the banks as the credit quality of corporates is set to deteriorate due to the ongoing recession.

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“The situation suggests that many banks would be going for capital raise in the near future to compensate for rise in the bad loans,” analysts tracking the sector told DH, which was vetted by executives from various private and public banks. The government is also likely to pitch in by way of bank recapitalisation of public sector banks (PSBs).

According to estimates by brokerages, there are risks of defaults on corporate debt exceeding Rs 10 lakh crore in the next three years.

According to India Ratings, COVID-19 may drive total slippages of up to Rs 5.5 lakh crore (5.7%) in FY21.

The credit costs for the system could increase up to Rs 2.7 lakh crore, of which around 70% could be attributed to the PSBs, it said in a recent note.

If accelerated provisioning regime is reinstated, then there could be additional credit costs of up to 0.6% for the PSBs.

In a scary situation, Rs 22,000 crore is due for repayment from the stressed shadow banking sector, which has seen a lot of headwinds in the next 12 months.

Further, banking sources said that 40% of major bank loans are rated ‘BBB’ or lower and are under moratorium -- a ticking time bomb waiting to explode.

According to rating matrix, ‘BBB’ rating means that the issuer has the current capacity to meet its debt obligations but faces more solvency risk than an A-rated issue and less than a ‘BB’-rated issue if the business, financial, or economic conditions change measurably.

Also, about 792 over-leveraged companies, mostly mid and small size, have their promoters pledging shareholdings worth cumulative Rs 1.84 lakh crore -- a pledge which may be invoked in case of a default.

In previous days, the lenders used to scarcely invoke the pledges on shares, fearing erosion of share value. But Zee fiasco changed it all when the banks and bondholders came under severe criticism.

Later, in 2019, the invoking of pledge led to Rana Kapoor’s shareholding at YES Bank trim to paltry 900 shares, as bondholders invoked the margin call.

In these changing dynamics, analysts say, that banks would be more than willing to invoke the pledged shares this time around.

The total outstanding corporate bonds in India are at Rs 31 lakh crore, while the industrial credit to non-financial sectors stands at Rs 46 lakh crore as of date.