The incremental credit by foreign banks have dropped to all-time low of 0.1 percent as of September 22 as against 2.6 percent during the same period the previous year, according to RBI.
The share of foreign banks in loans to Indian borrowers, encompassing both wholesale and retail segments, has declined to 3.8 percent in FY22, down from 4.2 percent in FY20, according to the data. Their collective credit growth from April to September 2023 was a mere 0.4 percent, compared to the systemic credit growth of 15.3 percent. Even in FY23, foreign banks reported a credit growth of just 4.4 percent, while the system-level growth was significantly higher at 15.4 percent.
In the corporate lending sector, most foreign banks show a preference for collaborating with multinational companies that have a presence in India or established conglomerates and corporations. However, many of these MNCs have not significantly expanded their operations in India in the post-COVID era, leading to a slowdown in the participation of foreign banks in the domestic lending market.
Core retail lending exit
Another contributing factor to the reduced involvement of foreign banks in the lending market is their withdrawal from core retail lending. The exit of banks like Citibank from retail business has left foreign banks with a limited presence in this segment, despite its potential for rapid growth.
Additionally, intense pricing competition, which has been a prominent feature since mid-2021, shows no signs of abating. This factor, too, contributes to the selectivity of foreign banks in their lending activities.
Most foreign banks in India operate as branches, with only a few, such as DBS Bank India and State Bank of Mauritius, functioning as subsidiaries of their overseas parent banks. These foreign banks often operate under the strict mandates and risk frameworks of their headquarter institutions, which can limit their flexibility in decision-making.
Despite these challenges, there is a silver lining in the form of foreign banks’ active involvement in funding foreign currency loans to domestic companies, either directly or by facilitating offshore loans. While the exact extent of these foreign currency loans remains undisclosed, experts suggest that they could contribute significantly to business growth in FY24, estimated at 7–10 percent.
