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PEs bullish on Indian banking sector

The Indian banking sector is witnessing a sudden wave of interest from private equity (PE) investors. The past two months have seen large PE deals in listed entities such as Ratnakar Bank, Karur Vysya Bank, ING Vysya Bank and Dhanlaxmi Bank.

PE players with long-term outlook can also be good equity partners for distressed banks. Apart from bringing in capital, they could provide inputs for turning around struggling banks. Notably, the Reserve Bank of India’s panel for governance of bank boards has also advised a larger controlling stake (up to 40 per cent) for PE investors. PEs with their long average investment duration can be a valuable source of capital for such banks, said the panel headed by P J Nayak, former CEO of Axis Bank.

According to experts, banks will need more equity as they begin to implement stringent capital adequacy norms under Basel-III. Since the global financial crisis in 2008, banking regulators the world over have been insisting banks hold more equity capital at all times to absorb shocks and losses. Also, the pace of fund-raising has increased as there is expectation of better business (higher credit demand) from FY15 after two years of slow business expansion.

Monish Shah, senior director with multinational professional firm Deloitte, says PE investors will be interested in new banks, as they will not have legacy baggage. “They will have the latest technology support and cost advantage compared to existing players. Also, banking and financial sectors have grown at 2-2.5 times the pace of economic expansion in the country. So, the potential is high for banking due to high unmet needs and the scope for spread of financial services. Banking companies will need capital to fuel growth, which PEs are in a position to provide, backed by knowledge and risk-taking potential.”

SAIF Partners, a PE firm, has invested for the first time in this space with Rs 150 crore in Karur Vysya Bank, while another PE major ChrysCapital keeps investing in ING Vysya and currently holds 4.6 per cent. Ratnakar Bank got $ 55-million investments from UK-based CDC, Asia Capital and existing investors. In February 2013, the bank raised $ 60.64 million from a group of investors, including Aditya Birla Private Equity, International Finance Corporation, IDFC Alternatives and Ascent Capital.

Vishal Sood, managing director of SAIF Partners, said: “We believe that financial services/banking as a sector plays a pivotal role in a growing economy such as India. Therefore, we are bullish on the sector to create a significant value over a long term and keep looking for an opportunity to invest in and partner with quality institutions such as Karur Vysya Bank.”

During the past year, the BSE banking Index has gone up 4.5 per cent; it stood at 14,182 points on May 6 with a change of 647 points.

In April this year, UK-based CDC group invested $ 28 million (about Rs 168 crore) in Ratnakar Bank, in its first direct equity investment in an Indian bank. CDC – a leading investor in Indian PE funds as a limited partner (LP or investor) – acquired a 4.8 per cent stake, valuing the bank at Rs 3,500 crore ($ 583 million). Earlier, CDC had made a $ 27.5-million deal with apparel e-tailer Jabong.com.

Ratnakar Bank currently has a network of over 160 branches with 350 ATMs across 12 Indian states. The funding will help the bank expand its presence in states such as Rajasthan, Madhya Pradesh and West Bengal.

Early in April, the Reserve Bank of India issued banking licences to two entities – infrastructure finance company IDFC and micro-finance lender Bandhan Financial Services. Being a listed entity backed by institutional investors, IDFC has strong risk management setup and corporate governance practices. It also has a very comfortable capital base.

Bandhan might support in the form of capital injection and expertise to further tone up governance as it takes steps to transform into bank. PE players will be inclined to invest in Bandhan as they understand the activity and have risk appetite for the same, according to Ashwin Parekh, managing partner, Ashvin Parekh Advisory Services.

Sanjiv Kaul, managing director of ChrysCapital, said: “The increase in stake in ING Vysya was based on our continued optimism in the Indian financial services sector including the banking and NBFC (non-banking financial company) space. ING Vysya is one of the best-performing banks in terms of asset quality despite the not-so-encouraging macro environment in India witnessed over the past few quarters.”

Last month, Kerala-based private-sector lender Dhanlaxmi Bank Ltd raised Rs 233 crore ($ 37.5 million) through a preferential allotment to a group of investors, including Kapil Wadhawan, chairman and managing director of Dewan Housing Finance Corp Ltd (DHFL). The lender plans to use the money to augment the long-term tier-1 capital base of the bank to meet growing business needs and to facilitate the additional capital requirements under Basel-II norms.

In another deal last week, ChrysCapital, through its arm Lavender Investments Ltd, picked a four per cent stake in City Union Bank at Rs 63 a share, aggregating to a total trade price of Rs 139.7 crore in an open market transaction.

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