Mumbai: Indian banks are looking to the country’s central bank to provide them with the money they need for their international operations.
A sharp cut in banks’ cash reserve ratio, which determines the money that commercial banks are required to keep with the banking regulator, has released Rs1 trillion and eased pressure on domestic liquidity for the time being, but Indian bankers are a worried lot as overseas money lines are drying up with the global liquidity crunch continuing and banks refusing to lend to each other.
Banks are demanding a special dollar line of credit from the Reserve Bank of India (RBI) to tide over the liquidity crunch that they might face in their international operations soon if the situation does not improve.
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Mint could not ascertain the exact amount that they are asking for, but at least two persons familiar with the development said it is at least $10 billion (Rs48,800 crore).
In fact, this is one of the key recommendations of the liquidity panel that submitted its report to the finance ministry on Monday.
Headed by India’s finance secretary Arun Ramanathan, the panel had a series of meetings with bankers, mutual fund managers and other financial intermediaries affected by the liquidity crunch before submitting the report. The finance ministry constituted the panel early this month.
At least one member of the panel confirmed that this is the most critical recommendation of the panel and RBI may announce a lifeline for Indian banks with large overseas operations at its mid-term review of monetary policy later this week. A banker said that Indian law may not allow RBI to use the country’s foreign exchange reserves for this purpose. Both the member and the banker spoke on the condition of anonymity. As on 10 October, India’s foreign exchange reserves were $274 billion, down from $316 billion in May. The pile of reserves has been coming down following RBI’s aggressive dollar sale in the market to stem the slide of the local currency which is trading at a six-year low to the dollar.
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“Unlike in India where deposits are the main source of money to build assets, inter-bank borrowing plays a key role in our overseas operations. Normally, we roll over short-term inter-bank loans but now overseas players are not rolling over the facilities. If RBI does not lend a helping hand, we will face problems,” said the chairman of a large bank that has large overseas operations who did not want to be named.
Among public sector banks, State Bank of India (SBI) has the largest overseas network. In fiscal 2008, it had a network of 84 overseas offices spread over 32 countries, covering all time zones. Bank of Baroda has 71 overseas branches spread across 25 countries and Bank of India is present in 14 countries through 26 overseas offices.
In the pack of private sector banks, ICICI Bank Ltd, India’s largest private sector lender, has the biggest overseas presence with subsidiaries in the UK, Russia and Canada; branches in Singapore, Bahrain, Hong Kong, Sri Lanka, Dubai International Finance Centre, Qatar Financial Centre and the US; and representative offices in the United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Axis Bank Ltd, another private bank, has a presence in Singapore, Hong Kong, Dubai and Shanghai.
In an earlier interview with Mint, ICICI Bank’s deputy managing director and chief financial officer Chanda Kochhar had said the bank has ample liquidity overseas to support its loan growth. SBI chairman O.P. Bhatt, too, said the bank’s international operations haven’t been affected by the liquidity crisis.
Overall, large Indian banks have close to $23 billion in international borrowings on their fiscal 2008 balance sheets. However, the entire money is not short-term borrowing. Banks have periodically raised long-term debt in foreign currency and there is no pressure on them to redeem such debt prematurely.
However, some of them are finding it difficult to convince the overseas players to roll over the short-term facilities such as certificate of deposits (CDs). Normally, short-term money is raised from a network of financial intermediaries with whom Indian banks have developed “correspondent” banking relationships. And they are rolled over to support their assets, which have longer term maturity than these liabilities.
Libor down but...
The London interbank offered rate (Libor), an international benchmark rate that banks charge each other for three-month dollar loans, dropped 36 basis points to 4.06% on Monday—the biggest drop in nine months—signifying that banks are no longer as averse to participating in the inter-bank market as they were a short time ago. In the second week of October, the three-month Libor rate was veering around 4.75%.
However, not all Indian bankers are sure that their correspondent banks will start lending to them soon. If they have money, they are buying US treasury bills which offer much less.
Under banking law, until recently Indian banks could borrow up to 25% of their capital from overseas lenders to support their domestic operations. RBI has recently doubled the limit. However, this has nothing to do with the overseas operations of the banks.
Traditionally, Indian banks followed the Indian diaspora but in recent times, they have aggressively expanded their overseas operations, following the footprints of Indian corporations, financing international acquisitions by these firms and supporting the plans of overseas companies looking to buy Indian firms.
Bank of Baroda opened 11 new overseas offices in 2007-08 in Australia, Bahrain, Ghana, and Trinidad and Tobago, besides extending its network in seven countries where it is already present. Last year, its overseas deposits grew by 17.33%, advances by 35.70%, and assets by at least 31%. Overseas operations accounted for one-fifth of the bank’s global business.
Bank of India’s overseas deposits grew by 11.91% and advances 37.83% over the previous year.
SBI became the first Indian bank to receive approval from Monetary Authority of Singapore for a full bank licence last year, which enables a foreign bank to open up to 25 branches in Singapore. It has correspondent relationships with 523 banks. Net profit from its overseas operations grew 84% last year, driven by 48% growth in advances.
ICICI Bank entered Germany last year through a branch established by its UK subsidiary, ICICI Bank UK Plc. Total deposits of ICICI Bank UK Plc. and ICICI Bank Canada rose by 76% last year. With at least 500,000 non-resident Indian customers, the bank claims to have a 25% market share in inward remittances to India. Its overseas operations roughly account for about one-fourth of total assets. For Axis Bank, the newest entrant in global markets, the corresponding figure last year was about 6% of assets.
Ashwin Ramarathinam contributed to this story.