(Bloomberg) — A rally within the debt of Indian banks is working up towards concern they’ll have to tackle better dangers as world’s worst dangerous debt pile is ready to weaken additional.Whereas common premiums on rupee-denominated Extra Tier 1 bonds of the 5 greatest Indian banks have fallen to about 200 foundation factors from the top of April, they’re nonetheless up some 117 foundation factors this yr. And a few traders say the rally has little room to proceed amid considerations India firms are getting downgraded like by no means earlier than.Prime Minister Narendra Modi’s $277 billion stimulus package deal is closely reliant on extra lending from state banks as he seeks to revive a sagging financial system. Indian banks have to construct up threat buffers to cushion towards an impending leap in company defaults tied to the pandemic, as McKinsey & Co. forecasts a rise within the nation’s dangerous debt ratio, which is already at 9.3%.“I don’t expect spreads on banks’ Additional Tier 1 debt to compress from current levels due to the risky nature of these bonds and the worsening bad loan problem at lenders which will keep demand low for such debt,” mentioned Aneesh Srivastava, chief funding officer at Star Well being and Allied insurance coverage Co. “It’s rather time to exit banks’ AT1 bonds.”India’s dangerous debt ratio may rise by one other 700 foundation factors because of the coronavirus disaster, in accordance with McKinsey. The nation’s lenders want to boost $20 billion of capital over the subsequent yr, of which state banks would require $13 billion, to construct up cash cushions, Credit score Suisse Group AG estimates.Sentiment towards lenders’ perpetual notes, banks’ first line of protection towards monetary shocks after fairness, weakened in March when the federal government wrote down the bonds of India’s fourth-biggest non-public lender in an unprecedented transfer. Collectors’ wariness deepened as a big mutual fund shut six debt plans in April and on considerations a six-month deferral of loan repayments till the top of August hides the extent of woes confronted by pandemic-hit debtors.Whereas a central bank price reduce in late May helped spreads to stabilize, they may not are available in a lot additional, traders mentioned. And it’s simply not the bond market which is cautious. India’s benchmark bank fairness index has fallen about 32% because the begin of the yr, outpacing the 16% drop within the broader market.“Bitter experience of the past, and concerns asset quality of banks will worsen further after the loan moratorium is withdrawn will keep demand for lenders’ Additional Tier 1 bonds low,” mentioned Mahendra Jajoo, chief funding officer for mounted earnings at Mirae Asset Funding Managers India Pvt. “For now, we will not buy banks’ capital bonds as the situation remains grim.”For extra articles like this, please go to us at bloomberg.comSubscribe now to remain forward with probably the most trusted enterprise information supply.©2020 Bloomberg L.P.