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India’s capital markets struggle

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By Rashmi Kumar
12 May 2020

India is facing yet another upheaval as the Covid-19 pandemic makes its way through the country. Capital markets activity has all but come to a halt. There are few bright spots, but bankers are focusing on innovation and thinking long term. By Rashmi Kumar

When the Indian government announced a surprise lockdown of the country on March 24, it got a mixed reaction from its 1.3bn people. Millions of migrant labourers were stranded in cities with no source of income. Companies had to pause manufacturing. In the financial sector, the impact was apparent in different ways for different institutions. 

For state-owned banks, most realised they have limited means for remote work, having never truly adopted a strong enough digital platform to support working from home. Privately-owned, as well as international banks, which had made efforts to build robust digital networks, were able to keep their businesses running remotely with minimal disruption. Non-banking financial companies (NBFCs) — which unlike banks are not considered essential services — came under pressure. 

In that kind of environment, taking stock of business became a priority for corporations. 

“There are a lot of unknowns so everybody is scrambling to make sense of the uncertainties,” says Mumbai-based Ashu Khullar, Citi India’s chief executive and regional head for south Asia. “Everyone is focusing on the basics: how do you take care of your liquidity needs given cash is critical in these times? A lot of our clients are focused on their cash flows to make sure they're buffeting their liquidity.” 

This means that Citi is trying to come up with “clever ideas” for companies to diversify away from their traditional reliance on bank loans, for instance. 

“We show them options, including going offshore as the markets can be liquid,” he says. “We need some of the strongest corporate and semi sovereign names to go and open up bond markets for Indian players.”


Risk averse 

That kind of action is yet to be seen since the Covid-19 outbreak in India began. 

The country’s borrowers had a strong start to the year in the international bond market, bringing 13 public dollar deals in January and February worth about $7.25bn, nearly double what was raised during the same period in 2019, according to Dealogic. 

But the flow stopped rapidly. Just one issuer, Lodha Developers International, raised dollars in early March. Since then, no borrower has come to the offshore market, as of early May, shows Dealogic. 

AsiaIn the domestic market, the Reserve Bank of India has taken big steps to shore up confidence, including pumping in liquidity, discouraging banks from parking their funds with the central bank and offering three-month moratoriums on term loan repayments. 

While these are helpful, market participants in Mumbai say it has not been enough to propel more lending from banks or lead to an uptick in the credit markets. 

Saswata Guha, a Mumbai-based director for financial institutions at Fitch Ratings, tells GlobalCapital Asia that bond yields in India did settle from their previous highs as a result of the RBI’s actions. But he adds that banks are still trying to conserve whatever limited capital they have, given the uncertainty around the virus and the lockdown duration. 

“The banks are being risk averse — as one would expect in such a situation — and simply trying to avoid putting more good money behind bad money, because at this stage, it is hard to guess where this whole thing will end,” he says. 

It is a similar story in the equity capital markets. ECM volumes stood at about $5bn from 18 trades in the first two months of 2020, followed by volumes of $1.7bn in March through 11 deals, shows Dealogic. However, the March numbers were driven by a chunky $1.4bn IPO from SBI Cards & Payments Services and a $293m block in HDFC Life Insurance Co. 

In mid-April, a roughly $100m sell-down in Metropolis Healthcare was priced, but no transactions have hit the market since, shows Dealogic. 

There are indications of a revival, however. 

Reliance Industries, a conglomerate controlled by billionaire businessman Mukesh Ambani, launched a rights issue of Rp531.2bn ($7bn) at the end of April, a deal set to be the largest rights offering from an Indian company, say bankers. 

Privately-owned Kotak Mahindra Bank said in April that it was looking to raise about $1bn-equivalent from a primary capital raise. Yes Bank issued a request for proposals to firms in March for a planned fundraising. RBL Bank and IndusInd Bank are also understood to be planning new transactions, while AU Small Finance Bank got approval on May 2 to raise Rp25bn from a possible qualified institutional placement (QIP). 

Citi’s Khullar says Indian banks are looking to raise equity capital to get ahead of the curve. 

“It is not only to cushion their balance sheet for potential adverse events in a crisis like this, but also to give themselves the ammunition to be proactive and get on the offensive.”  

Guha, however, is a bit more sceptical, especially about state-owned banks that may start to think of tapping the capital markets to shore up their balance sheets. 

“Relative valuations have witnessed a sharp fall across banks but in certain cases, the drop has been quite spectacular,” he says. “We believe there is a very limited chance of state banks going out and raising money on their own, which means that they ultimately have to depend on the government, which has a tight fiscal purse.” 


NBFC woes continue 

The shares prices of Indian banks have taken a hammering amid the pandemic. From the beginning of March until the end of April, the Nifty Bank index, for instance, which tracks the 12 most liquid and large capitalised banking stocks in India, fell by about 26%. 

An ECM head at a private sector bank in Mumbai says stock price movements show clear distinctions between huge and small banks in the country. 

“The large ones, like HDFC Bank, Kotak and ICICI Bank, are not in a precarious condition yet,” he says. “Their stocks have been affected but funding and liquidity are strong. 

“With the other smaller banks, like Yes, IndusInd Bank and RBL Bank, it is a perception issue. If they have more slippages, more exposures to medium and small enterprises, or more consumer loans, some of them can turn delinquent. Asset quality and growth are concerns for small banks and NBFCs, but people are looking to buy larger banks at these levels.” 

AsiaThe NBFC sector has already been under pressure, since Infrastructure Leasing & Financial Services, a sprawling infrastructure development and finance company, defaulted in September 2018. 

Its downfall brought the financial woes of other NBFCs to light, leading to a liquidity crunch in the sector. 

That is now only set to get worse. 

Kunal Kumar Kundu, India economist at Société Générale, points to the difficulties in credit evaluation as NBFCs lend a lot to micro, small and medium enterprises (MSME), which do not often have sufficient credit information. 

“A lot of NBFCs will be in trouble [as a result],” adds Bangalore-based Kundu. “This could impact banks and their loans.” 

This means that non-performing loan ratios, which had started to recover among Indian banks in the past year, will being to feel the heat again. 

Slippage levels at banks are expected to be high in 2020 and loan recoveries will get delayed, leading to a rise in NPLs again, says Deepali Seth-Chhabria, India bank analyst at S&P Global Ratings. 

Since the Covid-19 outbreak in India, S&P revised its outlook on Axis Bank and ICICI Bank to negative from stable in mid-April. 

NBFCs such as Shriram Transport Finance and Hero FinCorp have been downgraded, while the outlooks on Bajaj Finance, Manappuram Finance, Muthoot Finance and Power Finance Corp have been revised to negative by S&P. 

Moody’s has placed the ratings of Hero FinCorp and India Infoline Finance under review for downgrade, while changing the outlook for Muthoot to negative from stable. 

Of these NBFCs, only Hero FinCorp and Bajaj Finance have not sold dollar bonds in the past, shows Dealogic. But Bajaj Finance raised a dual-currency loan of about $571m in January, denominated in dollars and Japanese yen. 


Funding toolkit 

There are still some ways for NBFCs to raise funds, however, in these choppy markets. 

Citi’s Khullar says his team is focusing on “non-conventional financing tools” that can give clients long-term money at competitive rates. 

“It’s not about going to commercial banks, it’s not only about doing a Eurobond or a domestic bond,” he says. “There is non-traditional capital available for long tenors for good companies, including NBFCs, which otherwise won’t be able to raise long tenor money.” 

For instance, Cholamandalam Finance Co, part of the Murugappa Group in Chennai, signed a $200m credit facility with Development Finance Corp in the US, a deal arranged and co-lent by Citi last month. 

The proceeds will be used for on lending to small and medium enterprises in low income areas that lack access to financing options, and those impacted by Covid-19. 

Similarly, Citi and Japan International Cooperation Agency (Jica) signed a $100m co-financing agreement with PNB Housing Finance in April. 

The deal is split between a $75m five year bullet loan from Jica and a $25m-equivalent two year rupee loan from Citi. The Jica portion will go towards on lending to affordable housing project loans. 

These are just a few opportunities issuers can find. On the capital markets front, not many expect public deals to flow imminently. But active conversations are taking place. 

“We are doing some pitches on Zoom and holding calls with both issuers and private equity firms,” says the ECM head. “These are more long-term business development focused conversations.” 

He adds that when deals materialise, QIPs will come first, followed by IPOs. There may be some opportunities for block trades too, he says. 

But the overall situation is bleak, with economists heavily slashing their growth expectations for India because of Covid-19. India is on track for its lowest GDP growth in nearly three decades this financial year. 

The government has room for more stimulus measures to boost both the economy and credit growth — which could in turn bring back some life to the country’s capital markets. 

This will not be an immediate panacea, however, but can help in the longer run. 

“The stimulus will not help prevent a contraction in economic growth,” warns SocGen’s Kundu. “But the stimulus, both fiscal and monetary together, will ensure that when the bottom is reached, and the economy is ready for a turnaround, there's enough grease in the machine to keep on moving — rather than rust in the machine which you first need to clear before the machine starts working.” GC

By Rashmi Kumar
12 May 2020