Srikanth Vadlamani, Vice President - Senior Analyst, Moody's Investors Service
Last Tuesday, the Reserve Bank of India (RBI), the country's central bank, announced new restrictions on the credit facilities that Indian banks can extend to overseas entities of Indian companies. The restrictions prevent banks from extending loans or guarantees that would be used to roll over the borrower's existing rupee loans. The new regulations are likely to increase the amount of reported nonperforming corporate loans. However, the increase would reflect a truer picture of bank asset quality.The RBI will not allow banks to extend so-called external commercial borrowings that merely allow borrowers to repay their existing rupee loans, and it will not allow banks to issue non-fund-based facilities such as standby letters of credit, guarantees or letters of comfort for the purpose of allowing borrowers to take loans elsewhere, except in connection with the ordinary course of overseas business.
In its announcement, the RBI also expressed concern that Indian exporters receiving loans on the strength of guarantees issued by Indian banks were using them to repay existing rupee loans, in violation of their stated end use.
Both fund- and non-fund-based credit facilities for Indian corporates that are used to repay existing rupee obligations keep the corporate borrower's credit risk with the bank. Indeed, some of these facilities appear to be extended when the domestic corporate is no longer able to service its loan. Thus, what is essentially a problem loan is not reflected as one by the banks because of financial engineering.
There is no systemic data on the extent to which Indian corporates have used such practices specifically to roll over existing debt, but anecdotal evidence suggests that these types of credit facilities obscure some banks' problem loans, and the RBI's explicit curb on such practices indicates that the practice is not uncommon. Furthermore, the foreign currency loans of banks such as Bank of Baroda (Baa3 stable, D/ba2 negative), Syndicate Bank (Baa3 stable, D/ba2 negative) and Bank of India (Baa3 stable, D/ba2 negative), which are primarily to Indian corporates or drawdowns on non-credit facilities extended by other banks to Indian corporates, have grown rapidly. That is in contrast to the tepid growth of their domestic loan books, supporting the view that these practices have not been uncommon.
At this stage, it is difficult to gauge the effect on specific banks because of a lack of data. For those banks that have seen an increase in their foreign currency loan book, the bulk of the increase has come from drawdowns on non-credit facilities extended by other banks to Indian corporates, which obscures which bank is carrying the corporate credit risk.
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