Impact of new ECB Norms on Indian Banks

Indian companies can now borrow only $20m offshore for use onshore; overall company cap at $500m remains but only for expenditure offshore. The RBI/government’s objective – stem $s into the market.

Higher loan demand, lesser liquidity, stable rates – 1] there should be some shift of loan demand from offshore to the domestic market; and 2] deposit growth should slow – we believe some offshore borrowing was being arbitraged into deposits. Both these developments should translate into 3] lesser surplus liquidity in the system, and a bias toward firmer rates – do not see them going up, but should arrest falling deposit rates and segment-specific lending rates.

This is probably a positive in the near term – higher loan growth, better liquidity balance and lesser offshore competition. Structurally however, it probably is a negative that the market is getting closed rather than opened up. Bank specific – the domestic-only banks – both private sector and Government, as relative beneficiaries. Banks with relatively large offshore operations – which are likely large investors in offshore Indian corporate players – ICICI, SBI and BOI, relatively disadvantaged in their international operations.