A research report by HDFC Securities has said that there has been a decline in the asset quality of foreign banks operating in India despite a growth in their loan books. The loan books of these banks have recorded profits.

It has been observed by HDFC Securities that nearly 5% of the loans disbursed by these banks have turned bad in the financial yaer 2009-10. This has disturbed the entire non performing assets (NPA) scenario of these banks. The systemic slippages of around 16% out of the total can be attributed to have been occured on the part of foreign banks.

It was recently announced by rating agency CARE that decrease in asset quality of banks would hurt their profitability.

It has been said by a senior executive from a foreign bank that the poor asset quality of these banks would continue in the FY'10 too and an improvement is expected only in FY11.

"We have seen the worst of the situation. We have improved customer orientation, credit underwriting policy and collateral management standard. But the reflection of good policies will start showing in FY11," said the senior banker.

The FY'09 saw HSBC report a gross NPA of 5.36%, CitiBank with gross NPA of 5.1% while StanChart was towards the better with NPA of 2.8%. Now these banks together account for 70% of the total balance sheet of the foreign banks operative in the country. They also account for 10% of the total gross NPA of the system.

HDFC Securities said that the Indian operation of foreign banks corner around 14% of the system's collective profit and, if listed, they would have a market capitalisation of $28-32 billion, nearly 25% of the country's banking system.

While a StanChart spokesperson said, "Our business strategy is more revenue and profit-driven, and not loan book-driven like local banks. Pure lending is a small part of our business, both in India and globally."

StanChart said it could very well realise the unsecured lending portfolio getting riskier so it slowed its business lines like credit cards and personal loans which are on the unsecured fromt and concentrated more on secured businesses like mortgages.

"Over 80% of our consumer book is now secured, and more than 70% of our wholesale book has a tenor of less than one year, which allowed us to price better," the spokesperson said.

Foreign banks in India collectively account for 5.5% of advances in the country's banking system. They also account for 26% of banks' fee income and 10% of employee cost.