The liquidity position in the Indian financial system may face fresh challenges if foreign banks fail to renew $52.7 billion (Rs 2,50,000 crore) in loans taken by Indian companies. The loans are up for repayment in the next seven months.
Western banks, weakened by the global credit crisis, may not be in a position to renew or extend the terms of the loans. If the Indian borrowers then turn to banks in the country to repay their overseas debt, it would suck vast sums of money out of the domestic economy. Lending in India, which is aimed at reviving growth here, would suffer.
This could also impact the country’s foreign exchange reserves, as the overseas credit market is already frozen and the other route of foreign exchange infusion — investments by foreign institutional investors (FIIs) — has been blocked. The FIIs have sold off Indian stocks worth $10.2 billion since April 2008.
According to Reserve Bank of India (RBI), in June 2008, the total short-term debt amounted to $45.3 billion on top of a $7.4 billion commercial borrowing burden.
“The excess funds availability in the banking system is expected to fluctuate between ‘just enough’ and ‘deficit’ in the months ahead,” said a public sector bank official on condition of anonymity. He said, “Hence, a massive dose of liquidity infusion will be required if companies are not able to extend overseas debt.”
“We are getting the sense that rolling over is not happening,” said Jyotinder Kaur, economist, HDFC Bank.
“While policy officials appear to have recognised this problem and eased some norms, more needs to be done regarding trade credit as refinancing and rollover have virtually ceased on the international front,” said Rohini Malkani, economist, Citigroup, in a November 14 research note.
What’s more, the country's imports through letters of credit (LCs) may get jeopardised, according to Mohan Shenoy, treasurer, Kotak Mahindra Bank. The LCs are financial guarantees given by Indian banks on behalf of Indian importers on the basis of which foreign banks make payments to overseas exporters.
If these guarantees are not honoured by foreign banks, Indian companies will have to use their rupee resources, which in turn, will add to the pressure on the domestic banking system.
“If that happens, there is no doubt it will lead to a draw-down on foreign exchange reserves,” said Ashish Parthasarthy, deputy treasurer, HDFC Bank.
Policymakers, however, seem alive to the problem. The RBI has cut the cash reserve ratio (CRR, or the percentage of money commercial banks need to keep with the apex bank) by 350 basis points since September to 5.5 per cent, adding Rs 140,000 crore to banks’ lending kitty.
There is room for a cut in CRR by another 250 basis points to 3 per cent, the minimum level stipulated under the Banking Regulation Act. This will push Rs 100,000 crore more of liquidity into the system.