Home >Industry >Banking >Pressure on foreign banks to cut India exposure grows after Moody's downgrade

MUMBAI : A clutch of foreign lenders with large exposures to Indian corporates may be forced to sell loans held by them with the latest revision of India’s sovereign ratings by Moody’s, downgraded to the lowest investment grade category on Monday.

According to multiple people aware of the ongoing negotiations, foreign banks already aware of the impending risks have begun negotiations to sell loans held by them, including those given to some of the best rated corporates in India.

“Most foreign banks follow the sovereign ceiling policy practiced 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 that country will fall in tandem irrespective of the issuer's financial standing" said the first person cited above.

“In such situations they typically reduce their exposure by exiting or part selling their loan portfolios" the first person added.

A second person, senior banker in one of the largest foreign banks in India said that many banks will be forced to sell their profitable assets as 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," said the foreign banker. For Indian banks however this could be favourable development given their risk averse stance in the recent months.

Having burnt their fingers in the last round of assets turning bad many Indian banks have turned picky about whom they lend to and therefore top-rated borrowers are always a big draw. While banks in India already have exposures to large corporate groups, the recent RBI regulations that allowed increase in group exposure by 5 percentage points to 30% of their capital, albeit temporarily, will be useful.

According to the second person cited above, any further downward revision in India's country risk will likely cause a major disruption. “In that case, our head offices would expect us to significantly and immediately reduce our exposure in India," he said. The Moody’s downgrade of India’s sovereign rating to Baa3 is a notch away from junk status and is now at par with S&P’s BBB- rating.

As of 31 March, 2019 (latest available), foreign banks had an outstanding credit of 4.03 trillion in India, 1.5% lower than the previous financial year, showed data from the Reserve Bank of India. Public sector and private sector banks had outstanding credit of 57.72 trillion and 32.58 trillion, respectively, as on 31 March, 2019.

The second person said that while foreign banks need to cut their exposure in India if the risk assessment changes, the central bank and the government do not take such actions lightly. He said that the regulator and the government is irked that a foreign bank is not serious about its presence in India.

“Some might just stay put until there are any further changes in ratings after what happened on Monday and instead of selling loans they might stop new loans," the second person said. As of September 2019, there were 46 foreign banks who were present either through branches or through a wholly-owned subsidiary and another 37 banks that only have representative offices.

An analyst at a credit rating agency said that most of the time when a foreign bank originates a large loan in India, a lot of that gets booked overseas because domestic branches do not have that much capital to disburse the entire loan. “Foreign banks will now look to downsell some of these large loans as the country's risk will go up. That said, these banks were already adopting a wait and watch strategy owing to India’s handling of the covid-19 situation and the consequent economic impact," the analyst said.

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