SBI cautious in India but looking to increase corporate lending in Europe

While being cautious about lending to Indian companies, State Bank of India (SBI) is looking to increase corporate lending in Europe.

SBI, Frankfurt, which has a status of an independent bank in Europe, has traditionally seen nearly 50 per cent of its lending as trade financing, helping Indian business houses expand in Europe and European business firms in India.

The remaining 50 per cent of the credit portfolio comprises a mix of external commercial borrowing (ECB) and lending to local corporate houses.

For long, nearly 70 per cent of SBI Frankfurt’s non-trade financing business comprised of ECBs. However, in the recent past, there has been a conscious shift in strategy to lend more to European companies, according to a top official of SBI Frankfurt.

Now, nearly 50 per cent of non-trade finance business portfolio consists of loans to European companies through participation in syndication with other banks.

SBI Frankfurt is looking at around 20-25 per cent growth in business over the next years, much of which would come from lending to European firms, confirmed a senior official at the bank.

The total loan book size of SBI Frankfurt, which enjoys status of an independent bank in Europe, is close to three billion euros. The bank’s area of operation includes the Scandinavian Countries and most of the Continental Europe.

"We have shifted our focus to lending to European companies as the risk of default has been much lower compared to India. Thus, while in India the corporate loan growth has been slow, in Europe the focus has shifted towards corporate loans," according to the official.

Notably, Indian companies too have been going slow in raising funds through external commercial borrowings, which have been a major area of operation for SBI Frankfurt, over the past few years.

According to data from Reserve Bank of India, funds raised through external commercial borrowing (ECB) and foreign currency convertible bonds (FCCB) by Indian companies in April 2017 was around $395 million, against around $3 billion in April 2014.

While a number of smaller firms do not qualify to raise funds through ECBs, the overall lack of demand for credit by Indian companies, even though the cost of funds is lower, has been a reason for sluggishness in the ECB market for Indian firms.

Local lending by international offices at SBI at grew by around 17 per cent at $14,948 million for the last financial year. At the same time, India-linked lending by international offices saw a drop of around 5 per cent at $12,301 million, according to data available with SBI.

Local lending accounted for around 34 per cent of the international portfolio of SBI, which was second to trade finances, which accounted for around 38 per cent of the credit portfolio for international operations last financial year.

Also, in the last one year, the share of local lending increased from around 32 per cent to 34 per cent, while the share of India-linked lending dropped from 32 per cent to 28 per cent for SBI’s international operations.

The low-interest regime and low risk of defaults in Europe make lending to local corporates in Europe a good business proposition. In FY17, SBI raised US$ 3.8 billion as medium and long term funds overseas.

The European Central Bank (ECB) has been maintaining its short-term benchmark at a record low of zero and is charging banks negative interest of 0.4 percent on excess cash parked at the ECB.

The gross and net NPA to gross lending from overseas operations for SBI fell by 55 and 34 basis points respectively at 2.37 per and 1.42 per cent at the end of last financial year. Against this, the overall gross NPA to gross lending at the bank at the end of last year was 6.90 per cent and net NPA to net lending was 3.71 per cent.

Total advances by international offices at SBI stood at Rs 2.86 lakh crore at the end of last financial year, registering a growth of 7.27 per cent over the previous financial year.