U.S. banks are giving a resounding thumbs-down to the Clinton administration's decision to impose economic sanctions on India for resuming nuclear testing.
Bankers said Wednesday that the measures-especially a curb on lending by U.S. banks to the Indian government and state-owned firms-could hurt banks and disrupt international finance.
"It's difficult when commercial banks are asked to participate in these kinds of sanctions," said Michael Heavener, executive vice president for international activities at First Union Corp.
"While I think India's decision to conduct these tests is regrettable, I'm a strong believer in open markets and free trade."
In recent years leading U.S. banks have markedly increased their presence in India, viewing it as one of the most promising of all emerging markets. The sanctions clearly could set back the effort.
John M. Morris, a spokesman for Citicorp, said that sanctions have become an increasing problem for American businesses outside the United States.
"It makes them (U.S. corporations) looked upon as unreliable suppliers because sanction legislation can be invoked at any time under conditions the business can't foresee or plan for," Mr. Morris said.
Sanctions against India, he added, "will fall particularly heavy on banks."
Industry watchers said it remains unclear at this point how many different types of financial transactions may be affected by the sanctions.
"Nobody knows at this point what kind of activity is covered," said Thomas L. Farmer, general counsel at the Washington, D.C.-based Bankers Association for Foreign Trade.
"Does this include enterprises owned by individual Indian state governments, outstanding commitments for things like project finance, letters of credit, and trading in government debt?"
Industry sources also suggested that the sanctions could disrupt the Indian economy, deter foreign investment, and slow moves to liberalize Indian financial markets, compounding an ongoing financial crisis in Asia.
"This will reinforce a lot of the existing caution about India," said Gary Kleiman, president of Kleiman International Consultants Inc. in Washington.
Although economic and financial sanctions have been imposed in the past against countries like Iraq and Yugoslavia, this is the first time the sanctions have been imposed under the 1994 Nuclear Proliferation Prevention Act.
As part of the sanctions, the Clinton administration is expected to order U.S. representatives of the International Monetary Fund and the World Bank to vote against extending fresh credits to Indian government agencies.
Sources said the sanctions are not expected to affect existing loans or loan guarantees made to U.S. companies by the U.S. government-affiliated Overseas Private Investment Corp.
According to wire service reports, these loans total some $760 million for financing and insurance to such companies as Enron Corp., Dresser Industries Inc., Motorola Inc., US West Communications Inc., and Bechtel Group Inc.
However, sanctions could dampen growing trade between the United States and India, which reached $11 billion last year. The moves also could curb investments by U.S. corporations in India and trade finance handled by U.S. banks and Indian banks in the United States, including State Bank of India and Bank of India. Executives at Indian banks in New York declined to comment pending release of details about the sanctions.
"I can't really say anything until I hear what the sanctions are," said Ranjana Kumar, senior vice president and head of U.S. operations at Bank of India.
During the past two years, such banks as First Union Corp., BankBoston Corp., J.P. Morgan & Co., and State Street Corp. have either opened banking offices or set joint ventures with Indian financial companies.
Earlier this week, J.P. Morgan & Co. obtained authorization to open a branch in Bombay to handle corporate finance, foreign exchange and government securities trading, financial advisory services, loans, and offshore placements.
"We're taking a wait-and-see approach," said a spokeswoman for Morgan. She added that it would be premature to comment on what impact the sanctions might have on the bank's plans.
BankAmerica is planning to open an fifth branch later this year in Hyderabad, and Citicorp recently opened a seventh branch in Puna.
Citicorp, the U.S. bank with the largest presence in India, has around $3 billion of assets in the country and seven branches in six cities. It also has large software development and computer processing facilities in Bombay and Bangalore. Like BankAmerica, Citicorp handles both consumer and corporate banking, including transaction services such as funds transfers.