25 Jun 2016 15:13 IST

For Indian banks, life just got tougher

Lenders could take a hit from overseas operations, lower exports and fewer ECBs

The domestic banking sector appeared to have somewhat wriggled out of its morass of stressed loans. That was before Britain voted out of the EU on Friday.

While the real impact on the sector will unravel in the coming months, a rise in stressed loans to companies that have exposure to the region, business uncertainty for Indian banks with a notable presence in those markets, and a falling rupee impacting future rate actions, are immediate fallouts of the landmark event.

Trade impact

According to the OECD, India is ranked the fifth highest in the UK’s importer list (excluding EU countries).

Brexit can hence have an impact on India’s exports to the UK in the near term. In 2015-16, India’s exports to the UK were $8.8 billion, 3.3 per cent of India’s total exports of about $262 billion. Imports from the UK, on the other hand, stood at $5.1 billion, 1.3 per cent of India’s total imports of around $380 billion. In terms of total trade, the UK accounts for about 2.1 per cent of India’s total trade.

The UK moving out of the EU will impact trade from this region in the near term. Hence, the impact on banks and other financial institutions with exposure to exporters and importers trading in the UK can be significant.

Banks, through their trade finance portfolios, offer letters of credit, bank guarantee and trade remittances. SBI, for instance, had trade finance assets of $14.6 billion as on March 2016, accounting for about 36 per cent of its international banking group’s net customer credit.

Overseas operations

A few Indian banks, particularly public sector banks, have overseas operations in the UK.

This, given policy uncertainties in the near term, will impact the business of these banks from not only the UK but also possibly the rest of the region. This is because Indian companies have found it easier to access the region by setting up a base in the UK.

SBI, Bank of India (BoI) and Bank of Baroda (BOB) have a notable presence in the UK. SBI has 13 branches/offices in the UK, and one each in Belgium, France and Germany.

According to RBI data, as on December 2015, BOB has 10 branches in the UK and one in Belgium. BoI has seven branches in the UK.

Canara Bank and Syndicate Bank have one-two branches in the UK.

Some Indian banks have also set up subsidiaries in the UK. These include BOB, ICICI Bank, Axis Bank, Union Bank and Punjab National Bank.

Fund crunch

Indian corporates have been raising funds via external commercial borrowings (ECB) from the global markets given the low interest rates in the US and Europe. According to RBI data, the outstanding ECB/FCCB stood at about ₹92,000 crore as on June 2015. Indian banks facilitate such ECB offers. In the near term, Brexit can cause some choking of this funds flow for Indian corporates.

Remittances from the UK, too, can take a hit. In 2015, remittances from the UK into India were $3.6 billion. Globally, India ranks second in terms of remittances from the UK.

Rate cuts worries

Finally, banks and India Inc that have not stopped clamouring for rate cuts are likely to be disappointed in the coming months.

The rupee’s volatility in the near term, post Brexit, will leave very little ammunition with the RBI to cut rates further.

Given that bank credit growth is still languishing at 8-9 per cent, status quo on rates may only add to the sector’s woes with no let-up in asset quality.

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