Debt downgrades can push India bank fund raising to $20 billion

A legacy of bad loans, a shadow banking implosion and a historic bank bailout in March have left Indian lenders weakened coming into the coronavirus lockdown.

Indian banks may have to raise $20 billion over the next year amid rising risks to their asset quality from borrowers that have seen debt rating downgrades, according to Credit Suisse Group AG.

“We estimate 2.5 trillion rupees ($33 billion) of debt has already been downgraded to ratings that are likely to make refinancing challenging,” analysts including Ashish Gupta wrote in note Tuesday. “These ‘fallen angels’ have 220 billion rupees of bond repayments due in the next 12 months,” the note added.

A legacy of bad loans, a shadow banking implosion and a historic bank bailout in March have left Indian lenders weakened coming into the coronavirus lockdown. At 9.3%, India already has the worst proportion of bad loans in the world, and that ratio could rise by another 7 percentage points due to the coronavirus crisis, according to a McKinsey & Co. report in April.

Even before the pandemic, India’s central bank in December warned that an improvement in banks’ bad-loan ratios will reverse as a slowing economy hurts borrowers’ ability to repay.

Most Indian banks are hoarding cash and reluctant to lend as the central bank lowered its key interest rate to 4%, the lowest level since 2000, and imposed a moratorium on loan repayments. The government has pledged $265 billion in a virus-relief package to soften a probable economic recession.

Of the $20 billion in expected capital raising by lenders, state-run banks will need $13 billion from the government to recapitalize, the analysts wrote. Credit Suisse raised its estimate for credit costs by 20%-60%, citing an extension of the lockdown and unimpressive fiscal stimulus.

India’s economy was pushed into a state of dormancy in April as the world’s strictest stay-at-home measures to contain the coronavirus took its toll.