Foreign banks may sell India loans2 min read . Updated: 03 Jun 2020, 12:42 AM IST
Some have begun talks to sell their loan portfolios, including those given to some of the best-rated firms in India
A clutch of foreign lenders with large exposure to Indian corporates may be forced to trim their loans portfolio after Moody’s Investors Service downgraded India’s sovereign ratings to the lowest investment grade on Monday.
Foreign banks are already aware of the impending risks and have begun negotiations to sell their loan portfolios, including those given to some of the best-rated corporates in India, according to two industry experts.
“Most foreign banks follow the sovereign ceiling policy practised by all major rating agencies, which means that if there is a downward revision of sovereign rating, the credit rating of corporate debt issuers of the country will fall in tandem, irrespective of the issuer’s financial standing," said one of the two people, requesting anonymity. “In such situations, they typically reduce their exposure by exiting or part selling their loan portfolios."
A senior banker at a large foreign bank said, requesting anonymity, that many lenders will be forced to sell their profitable assets if India’s risk increases. “These are top corporates in the country and we are hoping that there will be a good demand from Indian banks."
For Indian banks, however, this could be a favourable development, given their risk-averse stance.
Having burnt their fingers in the last round of assets turning bad, many Indian banks have become picky about whom to lend and, therefore, top-rated borrowers are always a big draw. To be sure, while banks in India have exposures to large corporate groups, the recent Reserve Bank of India (RBI) regulations that allowed increase in group exposure by 5 percentage points to 30% of their capital, albeit temporarily, will be useful.
Any further downward revision in India’s rating will likely cause a major disruption.
“In that case, our head offices will expect us to significantly reduce our exposure in India," the foreign banker said.
Moody’s downgraded India’s sovereign rating to Baa3, which is a notch above the junk status, and is now on a par with S&P’s BBB- rating.
As on 31 March 2019, foreign banks had an outstanding credit of ₹4.03 trillion in India, 1.5% lower than the previous financial year, showed data from RBI. Public sector and private sector banks had outstanding credit of ₹57.72 trillion and ₹32.58 trillion, respectively.
The senior banker said while foreign banks need to cut their exposure to Indian companies if the risk assessment changes, the central bank and the government will not take such actions lightly, and both will be upset that a foreign bank is not serious about its presence in India. “Some might just stay put until further changes in ratings and, instead of selling loans, they might stop new loans," he added.
As of September 2019, there were 46 foreign banks who were present through branches or a wholly owned subsidiary and 37 banks that only have representative offices.