At a time when the international market was grappling with a severe liquidity crunch, Indian banks overseas have shifted a part of their business to their domestic branches to meet their client needs.

This shift in business was making life difficult for the banks at home as credit situation in the domestic market too was tight, said bankers.

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In recent months, banks have been unable to raise funds in overseas markets, and having sanctioned credit lines, they are now substituting loans with rupee funds.

"The credit market has frozen overseas and the first priority for us is to disburse loans that we have already sanctioned. Since a lot of financing is for Indian companies, we can substitute it with rupee credit," Axis Bank chairman P J Nayak said.

A public sector bank chief added that there was virtually no business transacted from the overseas branches in the last fortnight and a part of the needs of the Indian clients, such as trade finance, was being handled out of branches in India.

When international markets were flush with liquidity till the end of 2007, it was possible for banks to raise resources, mostly short-term, to fund assets. But with the financial meltdown, the fund flow was down to a trickle, and even if resources were available, they came at a steep cost, a senior State Bank of India [Get Quote] official said.

In addition, bankers said that the credit crisis and slowdown in some developing countries would force Indian banks to put on hold the dream of growing the balance sheet through overseas expansion and supporting Indian companies in international mergers and acquisitions. In fact, they may see their balance sheets shrinking in 2008-09.

Trade finance, which facilitates export-import activity, may see some impact as banks prune their share of funding in international books, according to a banker.

"The cost of raising resources has shot up, which will make lending costly and there will be few takers. Besides, demand from local clients and Indian companies, which were raising funds abroad, will come down," another public sector bank executive said.

The counter-party risks and rising defaults is also making banks go slow.

Bank of Baroda [Get Quote] chairman and managing director M D Mallya said, "There will be overall downsizing in the international business." BOB has seen its international advances grow from Rs 16,358 crore (Rs 163.58 billion) in 2006-07 to about Rs 22,200 crore (Rs 222 billion) in 2007-08.

An executive of the Union Bank of India's [Get Quote] Hong Kong branch said, "Everyone will be cautious while taking new business."

He, however, claimed that their activity was normal and some more business opportunities could emerge as many international players have disappeared from the scene, creating space for new players.