Coronavirus: India's lockdown rattles lenders

India’s embattled financial institutions are facing further challenges attracting overseas funding as the coronavirus pandemic threatens to cut growth in the world’s fifth-largest economy to 30-year lows.

Loan syndications for Indian borrowers in recent weeks point to growing concerns among offshore lenders of a further deterioration in asset quality as a result of the sharp decline in economic activity and rising unemployment. India enforced a 21-day lockdown on March 25 to combat the COVID-19 pandemic.

In the past month, financial institutions including PNB Housing Finance and debut borrower HDB Financial Services have closed loans with limited syndication.

The reception from offshore lenders underscores the weak sentiment towards the Indian financial sector, which is already reeling from a series of defaults.

“Confidence in the financial sector is low and one of the issues people have had is non-performing assets,” said a loan syndications banker at a global bank. “We are only hoping that there are no fresh spurts of NPAs. Otherwise, it could be an even longer journey to recovery.”

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BANKING SECTOR WOES

NPAs at Indian banks are not a new concern, with a systemwide bad loan ratio of 9% as of March 2019, according to the Reserve Bank of India.

Since the lockdown began on March 25, Fitch has cut India’s GDP growth forecast for the fiscal year ending March 2021 to 2% from 5.1% previously. This year could see the slowest growth in the country in 30 years, the ratings agency said.

Moody’s on April 2 changed its outlook for the Indian banking system to negative from stable, warning the lockdown will eventually lead to pressure on profitability and capital.

India’s banking sector suffered another blow in mid-March when the RBI seized control of beleaguered Yes Bank, the country’s fifth-largest private sector bank, which recorded a surge in gross bad loans to 18.87% of total loans for the quarter ending December 31 from 2.1% a year earlier.

Non-banking financial companies have been wrestling with tight liquidity following defaults and credit scares that began with missed payments from Infrastructure Leasing & Financial Services in September 2018. Dewan Housing Finance, another major NBFC, defaulted on its debt last June.

“Debt capital will continue to remain a challenge for most NBFCs,” said one Mumbai-based banking analyst. “There are lenders and investors who at this point in time are only comfortable with certain names and not the others, so access to funding still remains constrained to a few.”

Since 2018, NBFCs have increasingly relied on Indian banks for funding and most banks are now near their exposure limits, he said.

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POOR APPETITE

Several NBFCs had lined up offshore borrowings late last year, but few international lenders joined the deals despite the rarity value and strong parentage of the borrowers.

Last week, PNB Housing Finance, a unit of state-owned Punjab National Bank, announced it had raised another US$100m through co-financing loans from two foreign lenders. That followed a month after it closed a US$75m three-year bullet term loan with only one bank joining after nearly six months of general syndication.

LIC Housing Finance, a subsidiary of state-owned insurance giant Life Insurance Corp of India, is returning to the offshore loan markets after nearly 17 years. It is expected to close a US$200m three-year loan without general syndication, having attracted only one bank in senior syndication so far.

In mid-March, HDB Financial Services, the NBFC unit of India’s largest private sector lender HDFC Bank, increased a three-year loan to US$530m from US$300m despite only two banks joining in general syndication. State Bank of India, one of the three leads, took a final hold of US$250m, increasing its initial underwritten commitment by US$150m.

In 2019, Indian NBFCs raised a combined US$3.07bn from offshore syndicated loans, according to Refinitiv LPC data. Overall, Indian loan volumes fell 24.5% year on year to US$18.20bn.

Deal flow from India also declined 23% year on year in the first three months of 2020 to US$4.95bn.