Promoter, PE stake may go up in private banks; IndusInd, HDFC Bank to gain

The role of promoters and private equity (PE) players is set to become more prominent in private sector banks, which may have to go to the market to raise equity capital in the next six-nine months, said sources in the know.
 

Lenders are staring at unexpected asset quality losses due to the slowdown in economic activity after the countrywide lockdown. This would impact the capital adequacy of banks adversely.  “Promoters may increase their stake up to 26 per cent from the current levels. For private banks not backed by promoters, a single-entity PE may be allowed to pick 15 per cent in the bank,” said a source.
 

Banks such as IndusInd Bank, HDFC Bank, Axis Bank and RBL Bank stand to gain from a move of this nature.
 

While an increase in stake in such a manner could be a departure from the licensing norms applicable to banks (which permit promoters’ share in a private bank at 15 per cent), the Reserve Bank of India (RBI) could allow promoters to have a higher stake.

The PJ Nayak Committee in 2014 had recommended allowing promoters to own up to 25 per cent stake in a bank, which has not yet been accepted.
 

The Banking Regulation Act permits an entity to have voting rights of up to 26 per cent in a bank if approved by the RBI. However, to curb concentration of power, voting rights may be capped at 15 per cent for promoters.

Non-promoter shareholders, which would include PE players, can hold up to 10 per cent in a bank through the approval route.

“Since these are within the framework of RBI rules, there isn’t any need for a specific notification or circular from the regulator. It only requires the central bank’s approval,” said the person quoted above.

Tepid response to YES Bank’s fundraising plans and a few more instances, including Lakshmi Vilas Bank’s three-year hunt for capital not finding success, are said to be the trigger for the regulator to think beyond the conventional shareholding structures.

Even as banks currently appear well capitalised, top banking executives acknowledge that the need for capital is set to increase exponentially.

“We foresee reasonable asset quality pressures as an aftermath of the extended lockdown, which is going to force banks to hunt for capital soon,” said a senior executive of a mid-sized private bank.
 

He is of the view that capital raising may be a herculean task, considering the present market conditions. Therefore, it is felt that it would be more viable for banks backed by strong and credible promoters to seek their help in tough times.
 

“Wherever there are worthy promoters, the regulator would be comfortable in allowing them to raise their stake in the bank,” said another banker.

In case of non-promoter-led banks, the view is that if a single PE is allowed to hold 15 per cent equity in the bank, the capital raising exercise may be more efficient and timely.
 

Also, with the recent stock price erosion, bankers say if PEs are to buy five per cent stake in a bank, it would be a non-starter for them.
 

“Given the correction in valuations, only a substantial stake like 15 per cent would entice a reputed PE to invest in Indian banks at this juncture,” said the person.  There has been precedence in the banking sector where the RBI allowed Prem Watsa-led Fairfax to acquire 51 per cent stake in CSB Bank (formerly Catholic Syrian Bank) in 2018.
 

Earlier this year, the banking regulator had allowed promoters of Kotak Mahindra Bank to own 26 per cent with reduced voting rights at 15 per cent from April 1.
 

In March this year, Hinduja-led IndusInd Holdings — promoters of IndusInd Bank — had sought the RBI’s nod to increase stake to 26 per cent in the bank, while restricting the voting power to 15 per cent. The RBI’s decision is awaited.
 

“Once the regulator approves such a structure, we will see more promoters opting to hike their stake in banks,” said a source.

Apart from IndusInd Bank, HDFC Bank, among the large names, has an identifiable promoter — Housing Development Finance Corporation (HDFC), which holds approximately 22 per cent of the total equity base (including American Depository Receipts). ICICI Bank, Axis Bank and RBL Bank are other banks which are not controlled by a promoter.