Mumbai: Rising non-performing assets, or NPAs, and constraints on capital flows following the global financial turmoil have taken their toll on foreign banks’ operations in India.
Bucking the trend: A Standard Chartered Bank branch in Delhi. The bank’s loan book grew 12% last year. Madhu Kapparath / Mint
Foreign banks’ loan portfolio in the one year to 3 July declined by 7.1% although the Indian banking industry posted loan growth of 16.3% during the period. In the same period last year, foreign banks’ loan growth was at least 33%, riding high on demand for mortgages, auto loans and other consumer loans.
The global financial crisis that intensified after the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. in mid-September hit most large banks in the US and Europe hard. After being bailed out with capital infusions, these banks are now focusing on their domestic markets instead of aggressively expanding overseas, including India.
Banks need capital to expand loan assets, but in many cases, parents of foreign banks operating in India are not in a position to infuse capital. Rising NPAs are also discouraging foreign banks from the aggressive asset creation they pursued in the past few years when the Indian economy was growing at an average pace of 8.5% and consumers were buying homes and cars and spending more on their credit cards.
Banks have to set aside money to cover NPAs, for which they require more capital.
Net NPAs at the Indian arm of Citibank NA increased to Rs10,507 crore at the end of fiscal 2009, against Rs4,718 crore in the previous year. Such loans as a percentage of net advances more than doubled to 2.6%, up from 1.23%.
The local unit of HSBC Holdings Plc increased provisions for bad loans by 65% to Rs2,879.39 crore in 2009. Net NPAs at the bank rose to 1.42% of net advances, from 0.58%. Its gross NPAs, or bad assets before provisions, reached 5.56% in March.
Deutsche Bank AG’s Indian arm saw a threefold increase in provisions and contingencies at Rs249 crore for 2009 from Rs76.82 crore in the previous year. Its net NPAs as a percentage of loans rose to 0.88% from 0.22%.
Citibank has stopped expanding its personal loan book to arrest rising delinquencies even though it wants to continue expanding its mortgages and credit-card portfolio. The bank’s corporate banking portfolio grew to Rs19,981 crore in 2009 from Rs18,742 crore in the previous year while the retail book grew to Rs22,416 crore from Rs21,557 crore.
While Citibank and Standard Chartered Bank continued to expand their advances, albeit at a slower pace, HSBC and Deutsche Bank have seen a dip in their advances portfolios.
HSBC’s loan book shrank by 8% in 2009—from Rs29,944 crore to Rs27,588 crore. In contrast, the contraction in Deutsche Bank’s loan book was marginal, from Rs8,960 crore to Rs8,797 crore.
Barclays Bank Plc. is also seeing a rise in NPAs. The bank aggressively built its unsecured loan portfolio after it entered the business in 2006. Fitch Ratings in April had said Barclays India increased its loan book from Rs170 crore in March 2007 to Rs12,000 crore in December 2008.
Since then it has scaled down the growth of unsecured assets. Fitch expects Barclays’ NPAs to increase significantly in the medium term. The rating agency expects delinquencies to increase in the corporate portfolio too as companies weather slowing demand.
An official at Deutsche Bank attributed the slowdown in advances largely to the credit environment and the bank’s cautious approach to the business. He declined to be named.
Stuart A. Davis, chief executive of HSBC’s Indian unit, had earlier said the lending slowdown had been largely on account of the economic downturn which resulted in lower demand from customers.
Standard Chartered Bank’s loan book grew 12% last year and it seemed to be an exception. “We continue to grow our consumer and wholesale banking book,” said Neeraj Swaroop, regional chief executive, Standard Chartered Bank, for India and South Asia.
India’s private banks, too, are seeing a slowdown in credit growth. In the year till 3 July, their loan portfolio grew by 4.2%, sharply down from 22.3% growth in the previous year.
Among private banks, ICICI Bank Ltd and Kotak Mahindra Bank Ltd are shrinking their loan books, while HDFC Bank Ltd and Axis Bank Ltd continue to grow their loan books.
ICICI Bank, India’s largest private sector lender, has seen its loan book shrinking by 11.61% to Rs1.98 trillion for the year ending 30 June. The bank intends to expand its assets by 5% this fiscal, increasing home loans and corporate banking business in the second half.
According to Dipak Gupta, executive director of Kotak Mahindra Bank, the bank’s advance book contracted on account of the credit squeeze and it was pruning its retail assets. “We consciously have stayed away from growing our retail book,” Gupta said, citing increasing loan delinquency.
India’s public sector banks, which account for three-fourths of the banking industry, have expanded their loan book by close to 22% in the past one year, lower than the 26.3% in the previous year, but outpacing their private and foreign counterparts.