SIB’s rights issue ratio could be 1:3?

KOCHI: The Thrissur-headquartered South Indian Bank (SIB) is set to become one among the first to tap the market to bolster the capital base with its Rs1750 crore rights issue in the wake of the recent RBI decision on loan risk weight.

The central bank in November had asked the banks to raise the risk weight of their unsecured loans and loans to NBFCs by 25 basis points from 100 per cent, effectively taking it up to 125 per cent.

Even otherwise too, SIB would need to add capital in order to replenish the capital erosion that could stem from the redemption of its 13.75 per cent Rs500 crore Tier 1 bond to be necessitated by the imminent exercise of a call option by SIB in January 2025.

According to sources close to the bank, the rights issue planned by the bank could be in the ratio of 1:3 given the current market price of around Rs27 per share and the fact that the rights are conventionally sold at a discount to the market price in the range of 10 to 20 per cent.

After factoring in the Rs500 crore bond redemption coming up within a year and the new RBI directive requiring the banks to raise the risk weight for unsecured loans and loans to NBFCs, the upcoming rights issue could strengthen SIB’s capital to risk assets ratio (CRAR) from the current (as of September 30, 2023) 16.69 per cent to about 18.35 per cent.

Analysts talking to myfinpoint said the bank which has been going rather slow on loan growth due to the large baggage of non-performing assets (NPAs), may be preparing to embrace a faster loan growth to make good for the lost opportunities in the past few quarters during when the bank languished.

RBI decision

According to a State Bank of India (SBI) report appeared in November, the Reserve Bank of India's (RBI) decision to increase risk weights on unsecured loans may require the banking industry to increase their capital base by 5 per cent.

The RBI increased risk weights on unsecured personal loans, credit cards, and lending to nonbank finance companies (NBFCs) by 25 percentage points. According to S&P Global Ratings, this will reduce Indian banks' capital adequacy by 60 basis points or 0.6 per cent.

Analysts say that the RBI's action will increase the capital requirements of banks, which will in turn increase their cost of capital.

SIB share capital

The Rs1750 crore rights issue being planned by the bank will boost the capital base from Rs7888.1 crore to Rs9638.1 crore, whereas the paid up share capital could increase from the present Rs209 crore to about Rs280 crore provided the issue is at the assumed ratio of 1:3.