The Tale of Two Lenders

While Indian banks say that domestic corporates are not borrowing from them, another news report says that Indian corporates have raised a record USD 30.25bn

As the Indian economy slowdown consistently, so has been the case of lending by banks in India. A news report says that bank credit growth in India may touch a 58 year low in FY 2020. Bank credit which grew at 13.3% in FY 2019, is expected to grow at a mere 6.5%-7% in FY 2020, registering a decline of about 45%, as compared to the earlier year. Bankers say that with private sector investment coming to a halt, there has been little demand for corporate credit. The companies are battling stress and are deleveraging wherever possible, preferring repayment of old loans, instead of taking new loans. While retail lending is showing steady growth, it is yet not enough to make up for the overall slump in the banking industry. An SBI MD confirms that the slowdown in lending is due to the slowdown in the economy and that the receding consumption demand has affected working capital lending to corporates by banks. Ironically, while lending by banks has slowed down, growth in deposits has not, which explains why banks have been depositing huge surplus funds with the RBI.

While on one hand, Indian banks say that domestic corporates are not borrowing from them, on the other, another news report says that Indian corporates have raised a record USD 30.25bn, which is over Rs. 2 lakh crores, from overseas lenders this year, taking advantage of abundant low-cost funds available in foreign markets. It has helped Indian borrowers to reduce their cost of borrowing by at least 100 basis points. If it helped Indian borrowers to reduce their cost of borrowing, it has helped foreign lenders to get good returns on their idle funds. Such borrowings by Indian companies certainly exposes them to the risk of depreciation in rupee value, but for the time being, with low-cost funds being easily available abroad, they are a happy lot. When Indian companies borrow from abroad in such large numbers, they certainly deprive Indian banks of lending opportunities, which also explains their present dip in lending.

This stark contrast of a slowdown in lending by Indian banks to Indian borrowers and an uptick in such lending to them by foreign lenders, raises numerous issues, hovering around as to why are foreign lenders eroding the market of Indian banks, with the risk of a deteriorating Indian economy impacting both in equal measure.

1. Indian banks are scared, risk-averse and are repairing their own house/struggling to survive.
2. They are not able to compete with their foreign counterparts who are sitting on huge surplus low-cost funds, with a strong likelihood of negative returns staring in their face.
3. Indian banks are battling huge legacy issues of giant NPAs and mismanagement which presently restrains them from lending, unlike foreign lenders.
4. Banks in India have virtually closed their project finance, long term lending portfolios, leaving an open field for their foreign competitors.
5. With India’s banking and NBFC industry in a mess, they face numerous RBI regulations, which restricts lending, particularly to stressed corporates. A lender abroad faces no such regulatory limitations imposed by the RBI.
6. Unlike banks in India, the ones abroad are much bigger and deep-pocketed, with an appetite to lend.
7. Increased lending to Indian corporates by foreign banks is an indication of their trust/faith in India as an investment destination, where they are willing to be long term players, with big-ticket exposures. They are also confident that a pick up in the economy is imminent and that green shoots of revival will be soon visible.

In the present scenario, the positive side is that though foreign banks are eroding the market share of Indian banks, it will not be for very long, since our banks will certainly jump into the fray, once their health is restored.