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Japanese banks choke lines of credit

Japanese banks have stopped lending to Indian banks.

The decision comes close on the heels of the US banks's decision to stop intra-day overdraft facility to Indian banks, landing State Bank of India and Bank of Baroda in temporary liquidity problems. The SBI's correspondent bank -- Chase Manhattan -- took the decision following the sanctions imposed by the Bill Clinton administration which disallows lending to the Indian government and its institutions.

Considering that no such measures have been imposed by the Japanese government -- which stopped aid to India after the nuclear tests -- the decision of Bank of Tokyo and Fuji Bank comes as a surprise. What is more, unlike the US, there is no provision under Japanese law which can order its banks to stop loans to any country.

This is the first instance of international banks slapping curbs against India, which have not been prescribed by their governments.

The immediate fallout of the decision seems to be that Indian banks will have to rely on non-Japanese banks which may insist on higher interest rates.

Asked why the banks took the decision, a senior Indian bank official said they seem to be playing it safe as they do not want to risk of non-payment by India following the sanctions.

Reports said the State Bank of India and Bank of India -- the only Indian banks to have branches in Japan -- have been hit by the Japanese banks's decision to stop fresh lines of credit to the Indian banks.

Though the Japanese banks have stopped fresh lines of credit, they have spared letters of credit and other financial instruments that are crucial for the Indian industry.

Any decision to stop these may have a crippling effect on the Indian economy, said a leading banker.

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