RBI Data Reveals Foreign Banks' Lowest-Ever Share in Indian Lending

Credit extended by foreign banks has reached an all-time low of 0.1 per cent as of 22 September, compared to 2.6 per cent during the same period the previous year, recent RBI data states.

The proportion of loans to Indian borrowers provided by foreign banks, covering both wholesale and retail sectors, has decreased to 3.8 per cent in FY22, down from 4.2 per cent in FY20. Their combined credit growth from April to September 2023 was a mere 0.4 per cent, in contrast to the overall credit growth of 15.3 per cent. 

Even in FY23, foreign banks reported a credit growth of only 4.4 per cent, while the system-wide growth was considerably higher at 15.4 per cent.

In the realm of corporate lending, many foreign banks tend to collaborate with multinational companies that have a presence in India or well-established conglomerates. 

However, post-COVID, several of these MNCs have not significantly expanded their operations in India, resulting in a slowdown in the involvement of foreign banks in the domestic lending market.

Another contributing factor to the reduced participation of foreign banks in the lending market is their withdrawal from core retail lending. The exit of banks like Citibank from the retail business has left foreign banks with limited presence in this sector, despite its potential for rapid growth. 

Additionally, intense pricing competition, which has been a prominent feature since mid-2021, shows no signs of diminishing. This factor, too, contributes to the cautious approach of foreign banks in their lending activities.

The majority of 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 positive aspect 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 per cent.