India's IDFC First Bank is looking to raise 20 billion rupees ($243.84 million) in equity capital in the second half of the current financial year, a source familiar with the matter said.

The fund raise follows a reverse merger between parent IDFC Ltd and IDFC First Bank announced earlier this month.

IDFC First Bank has board approval to raise 40 billion rupees. It has already raised close to half that amount through a preferential allotment to IDFC Ltd.

The remaining amount of about 20 billion rupees will be raised in the second half, the source, who declined to be identified as discussions are private, said. IDFC First Bank declined to comment.

Shares of the lender have gained 33% so far this year compared to the Nifty banking index, which is up 6.4%.

Over the past three years, IDFC Bank has brought down its bad loans and accelerated deposit accretion to strengthen its fundamentals, allowing it to raise institutional capital with ease, said the source.

"This will help fund the bank's growth."

Its deposit base has risen 47% over a year ago to 1.4 trillion rupees as of March 2023, while its loan book of 1.6 trillion, which was weighed down by infrastructure loans, is now heavily weighted in favour of more healthy retail loans.

Gross bad loans have fallen to 1.65% from 4% in March 2021.

IDFC Bank can grow 25% on a compounded annual basis and gain market share, said brokerage house Emkay in report dated July 7.

It is expected to deliver a return on assets (RoA) of 1.3-1.5% and a return on equity of 12-15% over the next three years despite factoring in capital raise, the brokerage house said.

Following the reverse merger, shareholders of IDFC will be direct shareholders in IDFC Bank, including the Government of India, which will hold close to 11% in the bank.

The government is not likely to seek a seat on the bank's board, the person said.

($1 = 82.0200 Indian rupees) (Reporting by Ira Dugal; Editing by Nivedita Bhattacharjee)