India should prepare to inject capital into state banks, and private sector lenders should strengthen their balance sheets to help the economy fight the coronavirus pandemic, the senior banker said.
I think the government should be prepared to provide capital to state-owned banks, said Uday Kotak, billionaire and founder of Kotak Mahindra Bank Ltd.
The legacy of bad debt, shadow bank inflation and the historic bank bailout in March weakened Indian creditors, slowing the economy and increasing unemployment. According to last month’s report by Credit Suisse Group AG, creditors will need to raise $20 billion in capital, of which $13 billion will be needed by state banks to strengthen buffers against possible loan defaults.
My advice to private banks and non-bank financial institutions: Make yourself stronger, strengthen your balance, Kotak said in an interview. And if that means raising capital, go ahead.
Kotak, who was appointed by the chairman of the Confederation of Indian Industry last week, is following his own advice. In recent weeks, Kotak Mahindra Bank has raised around $1 billion by selling shares to replenish its capital reserves. Udai Kotak himself raised the same amount by selling the bank’s shares.
Prime Minister Narendra Maudie has promised a $277 billion stimulus package to stimulate the economy, but economists still expect GDP to fall in the fiscal year ending March 2021, the first decline in more than four decades.
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Graphs : Bloomberg
Modi’s stimulus is heavily dependent on an increase in public bank lending, although the government did not provide funds to recapitalise the sector in this year’s budget. Finance Minister Nirmala Sitaraman, however, said she would be flexible with regard to capital injections if necessary.
Kotak, 61, said the time has come for Indian companies to use the financial markets as a safety net to apply for loans in the banking sector.
There is a bank-managed model and a market-managed model. I’m glad the market model worked much better during the Kovida crisis, Kotak said.
According to Bloomberg, Indian companies have raised a record 3.83 trillion rupees ($50.7 billion) in bonds this year, compared to 3.62 trillion rupees a year ago. The share issue was reduced to Rs 678 billion.
Mr Kotak said that one of the main areas of work of the Head of the Industry Association will be to improve Indian corporate governance. Kotak, who was appointed head of Infrastructure Leasing and Financial Services LLC after the non-bank creditor defaulted in 2018, is already playing a key role in finding solutions to the shadow banking crisis.
The way forward will be difficult for non-bank creditors, Kotak said. Financing a company is a difficult business, and it will put the survival of the fittest to the test.
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