Global banks lend less to Indian peers, firms in Q2: BIS

International banks have sharply reduced their exposure to banks and non-banks in India during the second quarter of this year, the latest Bank for International Settlements (BIS) figures on consolidated global banking flows revealed on Thureday.

The total claims of foreign banks and non-banks to their counterparts in India came down to $4.2 billion during the second quarter of 2008 (ended June) compared with $13.47 billion in the preceding first quarter.

Simultaneously, banks in India have also reduced their liabilities abroad by withdrawing around $1.68 billion during the period under review. Only non-banks in India have stepped up their exposure abroad during this period by increasing their liabilities by about $172 million.

In what appears to be an enveloping global credit crisis, BIS — known as the central bank watchdog — revealed that international lending among cross-border banks nosedived in this period by $1.1 trillion to $39.1 trillion. This is the biggest decline since the second quarter of 2001, following the burst of the dotcom bubble. It is also the sharpest contraction during the last 30 years, analysts said.

“Banks’ cross-border liabilities shrank by $1 trillion, including drawdowns by $633 billion of the US dollar and $184 billion of the pound sterling, mostly by residents of the United States, the United Kingdom and Switzerland,” BIS said.

The latest figures also reveal the growing fears over the worsening siege in inter-bank lending since August 2007, when the subprime mortgage crisis started unfolding in the global financial system.

As regards exposure to banks and non-banks in India, the decline started in the the first quarter of 2008, when foreign banks reduced their lending to $13.4 billion from $18.3 billion in the fourth quarter of 2007. That lending has further shrunk to $4.2 billion in the second quarter of 2008.

More importantly, banks in India have dramatically reduced their liabilities abroad since the beginning of the subprime mortgage crisis last year. For example, banks reduced their liabilities abroad by withdrawing $21.1 billion in the third quarter of 2007, $17.59 billion in the fourth quarter of 2007, $8.3 billion in the Q1 of 2008 and $1.6 billion in the Q2 of 2008.

At the end of the second quarter of 2008, the total foreign bank claims on banks and non-banks in India were $225.15 billion. It includes claims by banks and non-banks in the United Kingdom amounting to $50.78 billion, the United States to the tune of $43.17 billion, the Netherlands amounting to $24.63 billion, Germany to the tune of $21.38 billion, Japan to the tune of $13.4 billion and so on.