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Overseas banking losing its charm for desi players

Government-owned Bank of Baroda saw its overseas business shrink 14 per cent year-on-year and sequentially 10 per cent in the June quarter.

Updated: Aug 24, 2017, 03.22 PM IST
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Although most banks claimed to have slowed down their overseas lending, the pace of contraction in global operations is also tightly correlated with muted demand for domestic corporate loans.
Although most banks claimed to have slowed down their overseas lending, the pace of contraction in global operations is also tightly correlated with muted demand for domestic corporate loans.
For local lenders, expansion beyond India's shores appears to have lost its allure, with leading financiers ICICI Bank, Axis Bank, and Bank of Baroda pruning their overseas businesses to restrain costs and free up capital for domestic lending.

Government-owned Bank of Baroda saw its overseas business shrink 14 per cent year-on-year and sequentially 10 per cent in the June quarter. Total deposits from the overseas ar m, too, declined a fifth on an annual basis.

"For about Rs 60,000 crore of buyers' credit and other instruments, we have an option of scaling down anytime we want," said PS Jayakumar, MD, Bank of Baroda. "We also have a large amount of customer liabilities that need to be placed out. But can we run it down? Yes, we can in a jiffy. And it wouldn't have a significant impact on our financials."

Although most banks claimed to have slowed down their overseas lending, the pace of contraction in global operations is also tightly correlated with muted demand for domestic corporate loans.

The majority of overseas advances were through ECBs (External Commercial Borrowings) issued to Indian companies and loans to India-centric promoter holding companies. According to central bank data, the average monthly ECB borrowings have come down to $2 billion since 2016 compared to $3 billion during 2013-2015.

According to Karthik Srinivasan, co-head of financial sector ratings at ICRA, two key factors have affected the overseas loan books of banks in the past two years. Amid a slowdown in overall project expansions, demand for corporate credit has reduced and has impacted the overseas credit books of banks. "Even the strength of the rupee has affected the loan book size when converted from dollar to rupee," added Srinivasan.

The rupee has strengthened from a range of Rs 66-68 per dollar in 2016 to Rs 63 in the recent past. It is not surprising then that ICICI Bank, which has overseas subsidiaries in the UK and Canada, reported a 22 per cent y-o-y drop in its overseas loan book in the June quarter in dollar terms. In rupee terms ,the contraction was 25 per cent. Over the past one year, the overseas book as a percentage of its total loan book has fallen from 21 per cent to 15.4 per cent.



It is not surprising then that ICICI bank, which has overseas subsidiaries in the UK and Canada, reported a 22% y-o-y drop in its overseas loan book in the June quarter in dollar terms. In rupee terms the contraction was 25%. Over the past one year, the overseas book as a percentage of its total loan book has fallen from 21% to 15.4%, with the bank indicating that it plans to reduce the proportion of international business.

"The proportion of the overseas book would continue to decline for us over the next couple of years. We don't have any specific target in mind in terms of where it would end up, but directionally it would still reduce from the current level of 15-16%,” N S Kannan, ED at ICICI bank, said in a recent analyst call. The private lender has witnessed a decline in the net interest margin (NIM) it earns on its overseas operations from 1.86% in FY16 to 0.73% in the June quarter.

Another private sector lender, Axis Bank is reporting significant contraction in its overseas advances over the last 18 months, mirroring the muted pace of growth in its domestic loan book. In the past three quarters, its foreign loan book has contracted by 4%, 6%, and 7%, respectively, while domestic advances have risen by 7%, 3%, and 6%, respectively.
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