Banks step in to help India Inc repay European debt

Indian banks have come forward to assist domestic companies in honouring their repayment commitments to European lenders.

Bankers and industry analysts say a number of public and private sector banks have expressed willingness to offer fresh loans to Indian companies to help them repay their overseas dues maturing in the near term.

The domestic lenders are also exploring opportunities to buy some of the loan portfolios directly from the European banks, which are under stress because of the sovereign debt crisis in that region.

The crisis in the euro zone has raised fears that most lenders in that region will not be able to roll over their loans. That would lead to huge redemption pressure on Indian companies this calendar year.

The finance ministry, however, played down these concerns. Economic Affairs Secretary R Gopalan said data provided by the Bank of International Settlements (BIS) did not cause any concern.

Quoting BIS's June 2011 data, Gopalan said, "India owes a total of $206 billion to other countries, of which European banks' exposure is only $18 billion."

Bankers and economists agreed. "It is a concern but it is not a crisis-like situation. Banks in the UK and Switzerland, which have long-standing relationships with Indian companies, are more immune to deleveraging pressures. Hence, there will not be a massive redemption pressure on Indian companies and domestic banks will have the capacity to assist them," said a senior official of a foreign bank in India.

Gopalan said the total FCCB/ECB repayment liability in 2012 was $20 billion. Similarly, total trade credit was $18-19 billion and only 10-12 per cent of the amount originated from Europe, he said. The total amount others owed India was $36 billion and the share of European entities in it was $2.4 billion.

However, according to the Bank of International Settlements website, consolidated foreign claims on India were estimated at $325 billion as on June 30, 2011, of which European banks accounted for $148

billion. Banking experts could not explain what could account for the sharp variation between government and BIS figures.

According to industry sources, Indian banks, including SBI, Bank of India, and Bank of Baroda, which have a large overseas presence, are likely to be the most active exploiting this business opportunity.

However, mid-sized lenders like IDBI Bank are also looking to capitalise. "We are looking at the India-linked portfolio of European banks. But, we will not dilute our own commercial interest. We will buy these portfolios if we find the yields attractive," a senior bank official said, requesting anonymity.

A senior executive with Export Import Bank of India said funding support could be extended for trade finances. For instance, if a European bank has indicated its inability to provide credit finance beyond a specific time, Indian banks may give a fresh facility.

Bankers also said many European banks had offered loans to Indian companies for merger and acquisition transactions. Many of these lenders have now initiated talks with Indian banks to sell these loans.

"Such transactions are happening at a bilateral level. If these loans are put up for auction, it will appear a distress sale at a deep discount," a top official of a Mumbai-based public sector bank said.

Industry players say the route also provides banks with an opportunity to boost their credit growth. The growth in bank advances fell to a 21-month low in mid-December.

According to RBI data, bank credit expanded 17.08 per cent annually as on December 16, 2011 -- below the RBI's 18 per cent forecast for 2011-12.

"These measures (offering loans to Indian companies to repay overseas dues and buying loan portfolios of foreign banks) mean despite the economic slowdown some banks will report higher credit growth. That is because the measures will expand their overseas books. Also, if the rupee continues to depreciate, the value of the overseas loan portfolio will increase," said a banker.