India lenders need to boost capital


“My advice to both private-sector banks and non-bank financial companies is: make yourself stronger, fortress your balance sheets, ” Kotak (pic) said in an interview. “And if that means raising capital, go ahead and do it.”

NEW DELHI: India should prepare to inject capital into state banks and private-sector lenders need to strengthen their balance sheets, to help bolster the economy against the coronavirus pandemic, according to a senior banker.

“I do believe the government will have to be ready to support public sector banks with capital, ” said Uday Kotak, the billionaire founder of Kotak Mahindra Bank Ltd.

A legacy of bad loans, a shadow banking implosion and a historic bank bailout in March have left Indian lenders weakened coming into the lockdown, which has stalled the economy and led to a surge in unemployment. According to a Credit Suisse Group AG report last month, the lenders need to raise US$20bil of capital, of which state banks will require US$13bil, to strengthen buffers against potential loan defaults.

“My advice to both private-sector banks and non-bank financial companies is: make yourself stronger, fortress your balance sheets, ” Kotak (pic) said in an interview. “And if that means raising capital, go ahead and do it.”

Kotak, who was appointed last week as the president of the Confederation of Indian Industry, has been following his own advice. In recent weeks, Kotak Mahindra Bank has raised close to US$1bil via the sale of shares to bolster capital buffers. Uday Kotak himself raised a similar amount by selling shares in the bank.

Prime Minister Narendra Modi has promised a US$277bil stimulus package to revive the economy, but economists are still expecting gross domestic product to contract in the fiscal year through March 2021, which would be the first decline in more than four decades.

Modi’s stimulus is heavily reliant on more lending from state banks, though the government did not earmark any funds to recapitalise the sector in the current year’s budget. Still, Finance Minister Nirmala Sitharaman said it will remain flexible about injecting capital if the need arises.

Kotak, 61, said it’s a good time for Indian firms to tap the financial markets, as a backup to seeking loans from the banking sector.

“There is a bank-led model and there is a market-led model. I am glad the market model is performing significantly better during the Covid-19 crisis, ” Kotak said.

Indian firms have raised a record 3.83 trillion rupees (US$50.7bil) via bonds so far this year, compared with 3.62 trillion rupees a year ago, according to data compiled by Bloomberg. Equity issuance has been more muted at 678 billion rupees.

Kotak said one focus as head of the industry confederation will be improving corporate governance at Indian companies. Appointed head of Infrastructure Leasing & Financing Services Ltd after the non-bank lender defaulted in 2018, Kotak is already playing a key role in proposing solutions to the shadow banking crisis.

The road ahead for the non-bank lenders will be difficult, Kotak said.

“Financing business is a tough business and it will test the principle of survival of the fittest.” — Bloomberg

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