They have sounded out mandarins in North Block and Mint Street that European banks exposure to India could be as high as 14-15 per cent of the gross domestic product (GDP). In absolute terms, approximately $220-225 billion.

A global investment banker, who did not wish to be quoted, told The Indian Express that the de-leveraging risks of European banks for India were being underestimated by the finance ministry and the Planning Commission. European banks have actively participated in funding India Inc through external commercial borrowings (ECBs) and trade credit during the last two years.

“Of the approximately $120 billion short-term exposure, trade credit alone accounts for about $36 billion,” the banker said. Post-2008 global financial crisis, when credit turned cheap across the world on the back of coordinated stimulus by governments, India Inc borrowed almost $ 46 billion from European banks alone in just two years.

When contacted, senior government officials said the situation was not as scary as was being feared by some. “Over the next 12 months, it is true payments to the tune of $120 billion are due. Take the worst case scenario that there will be no foreign inflows over the next 12 months. So, our forex reserves will dip from $300 billion to $180 billion. Even if we assume that we need $120 billion to cover a year’s import, we have 50 per cent more reserves,” said a senior Planning Commission official.

“Most the credit is rolled over or extended by European banks. But they are not doing it anymore,” said another banker, who recently had interaction with senior officials in the finance ministry, the Planning Commission and the Reserve Bank of India. This has forced Indian corporates to borrow at higher costs from domestic banks. “Many Indian companies are moving onshore. This trend is likely to accelerate in the coming months,” the banker said.

According to the Bank of International Settlements (BIS), European banks' claims against India stood at $159 billion at the end of June 2011. This is almost 55 per cent of the total international claims of $289 billion on India by banks of all foreign countries reporting to BIS.

“What happens if the crisis worsens and European banks require capital for themselves. The first casualty will be emerging economies such as India. They will stop extending trade credit, start selling participatory notes, syndicated loans and corporate bonds,” the hedge fund manager, who manages $2 billion in equity investments, pointed out.

Indian banks will be required to take such assets on their books. Financial market pundits say some part of the domestic credit growth during the year is a result of offshore (foreign) credit being converted into onshore (domestic) credit. In other words, Indian banks have already started buying some of the assets sold by European banks, resulting in a higher credit growth.

But, another government official said, this assumes that the economy will move to a high-growth trajectory growth immediately, resulting in high demand for credit. “The impact of monetary tightening on demand will persist for a while. So, we do not expect any rush for credit. The credit growth is expected to remain muted over at least the next six months,” the official said. “Only if the domestic banking sector is expected to meet the entire demand for credit that we may face a liquidity pressure. But remember, even in 2008, we managed the crisis through just enhanced liquidity adjustment facilities (LAF),” the official added.

“Policy-makers in India do have a sense that things can turn out to be bad,” said a foreign analyst. “But can it get ugly?” One of the reasons why the Reserve Bank of India resisted cutting the cash reserve ratio (CRR) despite demand from various quarters in the recent monetary policy review was its sense of a build up of liquidity pressures in the coming months. “RBI is the only institution that is alive to the adverse impact that the Euro zone crisis can have on India,” the analyst said, based on interactions with officials in the central bank.