Indian banks have a rough road ahead
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Indian banks have a rough road ahead

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India’s banking sector has long been in trouble. However, while a few banks can appeal to the equity capital markets to restore their capital levels — and their reputations — this won’t be easy or cheap.

Yes Bank is carrying out a Rp150bn ($2bn) equity fundraising this week. The jumbo deal follows a government-led rescue of the privately-owned lender earlier this year after non-performing loans and losses grew rapidly.

It is now tapping equity investors for funds to cover its expenditure for the next two years.

The fundraising comes at a cost, however, not just for Yes but also for the numerous other equity issuances planned by India’s banks in the pipeline.

In the case of Yes Bank, liquidity in its stock dried up in the second quarter this year, meaning it has been stuck trading far above its fair value. As a result, it is offering its shares at a more than 50% discount to the current market price.

While tantalising, the discount is telling of the dire situation the bank is trying to recover from. More importantly, however, it is also an indication of what other lenders will have to face when tapping ECM.

For starters, Yes Bank is only really able to raise such a large amount of fresh equity because it was saved in March by government-backed lender State Bank of India, which now owns 49% of the bank. Naturally, the bookrunners for Yes Bank’s public offer, a re-IPO of sorts, have made good use of SBI’s backing to generate early demand for the fundraising. But it will not be the same for other banks.

The country’s financial sector has been shaken repeatedly by scandals over the past two years, set off by the dramatic collapse of Infrastructure Leasing & Financial Services in September 2018.

Since then, a lot of skeletons have emerged from the closets of banks. 

Punjab National Bank made the most recent addition to the pile, stating in a filing on July 10 that there had been a Rp37bn “fraud” in a non-performing asset account for Dewan Housing Finance Corp. This came just two years after it reported a separate $2bn fraud.

But on Monday, PNB also said it is planning a Rp70bn equity capital raising and will seek shareholder approval at its annual general meeting in early August.

Yes declined to comment for this story. PNB could not be reached for comment. 

PNB joins a growing pipeline of banks that are teeing up various ways to tap the equity capital markets. But they all come as India’s banking industry is being tested again.

The institutions will have to throw investors a bone — but how big it will be will depend on the bank in question. But what is clear is that all lenders will likely face more scrutiny than usual, with both domestic and international investors putting firms' credentials under the microscope.

The Covid-19 pandemic also doesn’t help. In late March India went into a lockdown for more than two months, bringing its capital markets to a halt.

The lockdown was eased in June, but it has taken time for the capital markets to get going again. The first IPO since lockdown was only launched this week — a small Rp5bn trade by Rossari Biotech.

Regardless of the restart in capital market activity, the macro view for India’s economy is wanting, with pressure high on the banking sector too.

The Yes Bank deal's outcome will be telling about investor appetite for Indian bank names. It will also show the struggles ahead for the country’s financial institutions. 

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