Just as India’s banks emerge from under a pile of bad loans to large energy, steel and other industrial companies, they are facing a new reckoning from the accelerating crisis in the country’s shadow banking sector.
A year after a series of defaults by Infrastructure Leasing & Financial Services Ltd. forced the government to intervene and exposed weaknesses in the sector, the problems of India’s non-bank financial companies are entering a new phase. Other weaker lenders such as Dewan Housing Finance Corp. and Anil Ambani’s Reliance Capital Ltd. are struggling, putting the loans they received from a handful of the regulated banks at risk.
“There will be some defaults, some additional slippages on banks’ books from the NBFC sector and that will be reflected in the performance of some of the bank stocks, which are more exposed to the weak NBFCs,” said Suresh Ganapathy, an associate director overseeing financial research at Macquarie Capital Securities in India.
Among the most vulnerable is Yes Bank Ltd., which has seen its shares plunge 65 percent in the past year amid wider worries about its lending policies. Last week, Moody’s Investors Service put Yes Bank under review for a downgrade, citing its “sizable exposure” to weaker companies in the NBFC sector.
Yes Bank and IndusInd Bank Ltd. may face higher than expected credit costs due to their lending to companies related to large leveraged corporates, UBS Group AG wrote in a June report. The lenders showed the greatest vulnerability to new risks emerging in this area and from non-banks and real estate firms, it said.
Credit Suisse Group AG in April identified the two banks as having greater exposures to four stressed groups — Anil Ambani’s conglomerate, Dewan, IL&FS and Essel — along with Bank of India, Bank of Baroda and State Bank of India.
Loans from the shadow banking sector expanded rapidly in the period up to the IL&FS defaults, a time in which the regulated banks were in the depths of a bad-loan crisis, weighed down by some $200 billion of soured credit. Non-banks accounted for nearly a third of all new credit over the previous three years, with some of the loans going to riskier sectors like infrastructure and property development. The lending binge was funded by bond issues and credit from India’s mutual fund companies, in addition to loans from banks. Since last year, the process has gone into reverse, with Dewan the latest to fall victim to tightening liquidity among NBFCs.
Yes Bank plans to raise $1.2bn to boost capital
Yes Bank plans to raise $1.2 billion over 18 months to bolster capital buffer through a mix of public and private share sales, CEO Ravneet Gill said.
“The number one priority would be raising capital,” Gill said in an interview on Monday, adding that the infusion would take place in two almost equal tranches with the first likely by the end of September. “Effectively, what we need is growth capital.” Gill took over in March pledging to improve transparency after his predecessor, founder Rana Kapoor, was forced out by the central bank for inadequate disclosure of stressed loans.