Banks have had a fabulous run for over seven consecutive quarters, and may close FY23 on a high note. Two aspects are in favour for them – reasonably clean asset quality and well-capitalised balance sheets. In the near-term, it’s unlikely that the asset quality could be challenged. But it is capital that banks may have to soon start planning for.
At present, private banks are at 15-17 per cent capital adequacy, and public sector banks at 12-13 per cent, are in a good spot, too. As a country we are bracing up for a strong infra-led spending to pick up in FY24, and given the relatively safe leverage position, banks may not want to let go of sustainable and viable projects. While the internal accruals may be adequate to handle the current business and its growth, without an influx of capital, banks wouldn’t be able to stretch their capacities for additional growth. What could make the equity raise almost inevitable is the global accounting standards that banks likely to embrace by FY25. The proposed provisioning norms and the disparity in accounting for mark to market losses between India and global practices could add another 100-250 basis points of pressure on capital.
But where will this money come from? Since FY20, although small in proportion, timely inflow of debt (or bond placements) has cushioned the capital positions of banks. Barring YES Bank, which was an instance of necessity, equity flows into the space has just been in trickles. That six out of four small finance banks are struggling to list in the market and NBFCs have had to refile their offer documents for lower fund raise is a good example to demonstrate that the best days of money chasing banking companies is behind us.
In a post Credit Suisse and Silicon Valley Bank era, and more importantly with cheap (and easy) money becoming a thing of the past, it’s unlikely that we would have generous investors queuing up to open their purses? The only defence is that India has been relatively insulted from global turmoil and is among the few green patches globally. This narrative may just sell, but won’t be adequate to fetch the demanding valuations. When it is a race to the finish line, the mighty may have an edge.
The top 5-7 banks (whether PSU or private) might stand a chance because of their demonstrated capabilities. But there are many below them who could be in a troubled spot. They won’t have a choice but be contended with what they get, if at all they anything. FY24 does seem promising on the outset, but capital would be the top of the mind concern for bank bosses.
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