As COVID-19 cases are rising in the country, lockdown rules don’t seem to relax anytime soon. With this, the economic losses are mounting. COVID-19 has caused extensive business disruption by significantly lowering demand and supply in the economy. It has bogged down the capital market, sending investors on hiatus. And, the banking and finance sector has also started to feel the hit. As a result, several banks are building up a war chest to help them fight any unprecedented condition arising if lockdown stretches further.
ICICI Bank, the second-largest private lender in India, has announced Rs 15,000 crore of fresh share sell after thirteen long years. Last time it issued shares in 2007 to raise Rs 8,750 crores in fresh funds. The bank’s board has agreed to the proposal of issuing new shares through private placement, institutional investment, preferential issuance, or follow-on public offering. Whether the bank will pick any one route for sale or a combination that’s yet to be disclosed.
In its exchange filing, the bank mentioned that it is looking at strengthening its balance sheet through equity release.
Prolonged lockdown situation is impacting the banks like any other business. Already loan recovery has slowed down due to moratorium and reduced repayment ability of borrowers. Several lenders have announced their plans to raise funds to bolster their capital buffer to tackle the rising volume of non-payment and bad loans in the coming months. ICICI Bank’s share sale announcement could be a part of its crisis management policy. ICICI is the third large private bank to announce share sale after Kotak Mahindra Bank and Axis Bank this year.
Axis Bank has also announced its plan to raise around Rs 15,000 crore from the market through share sales. Kotak Mahindra has already raised Rs ₹7,442 crores in QIP selling. Several other banks such as Yes Bank, Bank of Baroda, RBL, and IDFC First are also in the process of raising equity capital (or already did) from public borrowing.
The fundraising can improve ICICI’s equity capital base by 200 basis points. Its filing announcement to the exchange reads, “The board has approved raising of up to 150 billion, in one or more tranches, by way of issuance of securities, through one or more permissible modes.”
ICICI Bank has already raised Rs 3,090 crores from selling parts of its holdings in its insurance arms ICICI Prudential Life Insurance Co. Ltd. and ICICI Lombard General Insurance CO. Ltd., for Rs 840 crore and Rs 2,250 crores respectively.
The bank’s common equity tier 1 (CET 1) capital, which is the yardstick to measure a bank’s ability to meet for loan losses and write-off loans along with the ability to fund an acquisition or capital infusion, lowered from 13.64 percent in March 2019 to 13.39 percent this year. So, with the bank’s capital position diminishing ICICI is on a rush to raise fresh funds through share sales.
COVID-19 has caused severe damage to the Indian economy, and it may take several months for the economy to bounce back to pre-COVID-19 condition. Crisil Ltd., the credit rating agency, has already warned that bad loans could rise to 11.5 percent in the current fiscal as against 9 percent in March 2020. ICICI Bank share sell will help the bank cover its bases and be better prepared if condition worsens in the coming months.