For Indian firms, bonds offer an easy option
PUBLIC SECTOR BANKS ARE GRADUALLY TIGHTENING UP THEIR CORPORATE LOAN EXPOSURES
They have sold the equivalent of $28.1b of bonds denominated in either rupees, dollars or euro this year as public sector banks tighten up loan exposures
India’s smallest capital infusion for state banks since 2009 should boost corporate bond sales as lenders have less room to fund businesses, ratings companies say. Companies have sold the equivalent of $28.1 billion (Dh103.2 billion) of bonds denominated in either rupees, dollars or euro this year, 11 per cent more than a year earlier, data compiled by Bloomberg show. Similar syndicated corporate loans dropped 50 per cent to $15.8 billion.
Growth in total lending is only starting to rebound from near the lowest since 2009.
The government will inject Rs79.4 billion (Dh4.6 billion) into banks in the year started April 1, Finance Minister Arun Jaitley said February 28, about 40 per cent less than Fitch Ratings Ltd.’s local unit reckons lenders need. Treasurers will struggle to boost capital buffers in the equity market as the CNX PSU Bank Index of 12 stateowned banks has fallen 17 per cent since December 31.
“Equity markets haven’t been supportive and the low budgetary allocation means government banks will probably have to compromise on growth,” said Ananda Bhoumik, a senior director at Fitch’s local affiliate India Ratings & Research Pvt. “That may starve the corporate sector of cash.”
Rate cut
Reserve Bank of India Governor Raghuram Rajan has cut the repurchase rate by 50 basis points to 7.5 per cent this year, helping spur demand for bonds. The yield on five-year AAA corporate notes declined 30 basis points to 8.37 per cent, while 10-year government yields slid 7 basis points to 7.79 per cent.
The lack of capital at state banks could put the brakes on total lending, which grew 12.6 per cent in the 12 months ended April 3, up from 9.5 per cent in the period ending March 20. Banks have been slow to pass on two interest rate cuts this year to consumers, with the pace of loan growth well off the average 16.85 per cent in 2012, Bloomberg-compiled data show.
Banks in India need to find as much as Rs220 billion of common equity to cushion against future losses this financial year, Moody’s Investors Service’s local unit estimates. Considering rules state the gap can’t be plugged with additional Tier 1 securities, they must either tap equity investors or conserve capital by reining in lending.
In the financial year ended March 31, the government injected only Rs69.9 billion of capital into state banks as against its original target of Rs112 billion. It also began differentiating between lenders, allocating capital to more efficient banks in a departure from previous practice.
The shift should improve capital allocation and reduce the frequency and impact of future bad debt cycles, according to independent research firm Credit Sights LLC. The move is also part of Prime Minister Narendra Modi’s aim of helping banks meet tighter capital-reserve requirements amid forecasts by the International Monetary Fund that India will experience the world’s fastest economic growth at 7.5 per cent this year.
“The government is cracking the whip over the public sector banks in order to pressure them to improve their performance,” Credit Sights analysts Nicholas Yap and David Marshall wrote in a March 4 report.
Easier restructuring
“We don’t think the government will allow them to default but their reduced size and role would eventually make it easier for the government to restructure the sector,” they said, referring more specifically to less well-managed public banks.
India’s Finance Ministry estimates state lenders will need an additional Rs2.4 trillion as equity by 2018 to comply with tougher Basel III requirements. They need as much as Rs1 trillion of capital this fiscal year, up from Rs400 billion last year, according to Moody’s local unit ICRA Ltd.
“In the short term, banks will try to conserve capital by deferring dividend payments or slowing their advances to lower rated corporates,” Vibha Batra, the New Delhi-based head of financial industry ratings at ICRA, said. “With monetary easing now started, banks can also aim to improve internal capital generation.”
The average cost of insuring the debt of five Indian banks with credit-default swaps has climbed to 163 basis points as of April 23 from a low this year of 156 basis points on March 5, according to data provider CMA. The rupee has weakened 0.8 per cent against the greenback since December 31 versus a 0.2 per cent appreciation in the yuan.
“Bond markets are going to be the biggest source for corporates because banks are streamlining their business and their capital won’t be enough to meet the underlying credit demand,” said D.R. Dogra, a managing director at CARE Ratings Ltd. in Mumbai.
“A 10-12 per cent jump in overall issuance this year because of banks’ inability to meet demand wouldn’t be a surprise.”
Equity markets haven’t been supportive and the low budgetary allocation means government banks will probably have to compromise on growth. That may starve the corporate sector of cash.” Ananda Bhoumik | Senior director at Fitch’s local affiliate India Ratings & Research Pvt