Foreign banks to prop-up Indian SMEs

Foreign banks that today supply only 5% of India’s total lending will soon be required to provide some 40% of loans needed by small businesses and exporters.

A committee set up by the Reserve Bank of India is recommending a proposal to this effect be approved by the Indian government. The intent is to ensure credit to sectors that generate jobs.

Under the proposal, foreign banks must provide at least 32% of loans to “priority sectors” that include agriculture. Indian banks are already implementing the 40% requirement.

“This move will put pressure on the profitability and asset quality of foreign banks operating in India,” said Nitin Kumar, banking analyst at Quant Broking, a Mumbai-based brokerage.

“It is not a very profitable business and the foreign banks will struggle to meet the target.”

Thirty-seven foreign banks have a combined market share of about 5% of total lending, said the Reserve Bank, the country’s central bank.