Foreign banks go local for credit

Raise more funds from Indian banks to meet exigencies of sub-prime crisis.

Foreign banks in India are increasing their committed line of credit from Indian banks to remain cash surplus.

According to market sources, most of the foreign banks overseas are in the process of announcing their results, which will give a full picture of the impact of the sub-prime lending by these banks.

Overseas markets are already hit by an acute dollar crunch, which is why major central banks, the US Federal Reserve, the European Central Bank and the Bank of England, had to infuse funds into the market.

These lines of credit are over and above the stand-by credit, which is usually maintained by foreign banks with the Indian banks. "This line of credit is for future and not immediate term, depending on the crunch overseas," said a foreign banker.

Sub-prime lending is the practice of extending advances to borrowers in the retail segment, who are below credit-worthy standards.

Sources explained that even if most of the foreign banks overseas were not directly exposed to sub-prime lending, most of them had floated subsidiaries that are active in such practices.

Sources added that the demand had been more pronounced from those foreign banks that had gone into retail banking, of late. Anticipating that the parent bank may take a hit due to the subprime crisis, these banks are arranging for liquidity on their own.

Meanwhile, foreign banks are making huge profits on their investments. Market dealers explained that these banks were converting dollar funds into rupees, giving them a return of 6.5-7.5 per cent even if they took a full hedge.

These funds are then getting invested into certificates of deposit and commercial papers which are trading at a yield of 8.30/9 per cent for six month to one year maturity.

Most of the foreign banks invest on behalf of the foreign institutional investors as their custodian banks.