Banks' foreign branches need RBI nod for exotic products
Move aimed at regulating overseas operations of Indian banks.
Foreign branches or subsidiaries of Indian banks proposing to deal in structured financial products will now require the prior approval of the Reserve Bank of India (RBI).
RBI has also clarified that banks need not seek its prior approval if their branches are dealing in simple financial products. The central bank’s measure is intended to regulate the activities of foreign branches or subsidiaries of Indian banks, which to date were mostly regulated by the host country’s regulations.
The move, known as cross-border supervision, will require foreign branches or subsidiaries to furnish full particulars of these products, including their regulatory treatment involving capital adequacy, valuation, pricing, exposure norms and the like as prescribed by the host country’s regulator.
Banking sources said RBI has extended its jurisdiction over products and activities of foreign branches and subsidiaries of Indian banks following the provisioning made by the banks for their exposure to structured products in subprime-hit markets of the United States and the United Kingdom. Structured products are exotic derivatives products.
Following the subprime crisis — which broke out as a result of high defaults on personal or housing loans given to less credit-worthy borrowers for higher returns — foreign branches of several public sector and private banks had to make provisions for their exposure to structured products, like credit-linked notes or credit derivatives.
Credit derivatives are instruments wherein the underlying assets are loans or bonds. If the value of the underlying loan or bond decreases, it will affect the profitability of banks as banks need to make a provision for the loss in their books to the extent of the fall in the value of the underlying loan or bond.
| TIGHTENING THE GRIP |
| * The central bank's measure is intended to regulate the activities of foreign branches or subsidiaries of Indian banks, which to date were mostly regulated by the host country's regulations |
| * The move, known as cross-border supervision, will require foreign branches or subsidiaries to furnish full particulars of these products |
| * RBI has clarified that banks need not seek its prior approval if their branches are dealing in simple financial products |
While ICICI Bank reportedly has an exposure of $1.5 billion to credit derivatives, other banks with exposure to such products include State Bank of India ($1 billion), Bank of India ( $300 million) and Bank of Baroda ($150 million).
While Bank of Baroda has provided around Rs 242 crore for exposure to structured products overseas, Bank of India has set aside Rs 161 crore. During the quarter (July-September 2008), ICICI Bank made a provision for around $78 million for the investment portfolio of its UK subsidiary, which resulted in the operations of the arm reporting a loss of $35 million.
In its annual monetary policy in April this year, RBI had mentioned about the cross-border supervision to control operations of Indian bank’s foreign branches. Currently, the Banking Regulation Act, 1949, governs most of the banking activities in India, while the overseas operations are guided by the host country’s regulations. RBI gets reports of overseas operations during the final audit of the banks.