Provide for deals with bankrupt Lehman arms, RBI tells banks

The Reserve Bank of India (RBI) has advised all banks to provide for the deals entered into directly or indirectly with subsidiaries of Lehman Brothers that have filed for bankruptcy globally.

The provision would have to be made for the quarter ended September 2008.

Sources close to the development said the total exposure of Indian banks to structured products — fixed income derivatives such as forward contracts, overnight interest rate swaps etc. — of Lehman would not exceed Rs 800 crore.

While Indian operations of Lehman Brothers are still intact, its subsidiaries namely Lehman Brothers Securities Asia, Lehman Brothers Futures Asia, Lehman Brothers Holdings Japan and Lehman Brothers Japan have already filed for bankruptcy.

Meanwhile, banks have been asked to terminate deals with Lehman subsidiaries, which were still operational, in due course of time in the open market or through bilateral negotiations with interested parties.

In a meeting held with the Fixed Income and Money Market Dealers’ Association, various foreign and Indian banks have already served their termination notices with regard to deals in structured products.

As for the exposure to the real estate sector in India, RBI is of the view that the government’s press note-5 on foreign direct investment (FDI) provides for exemption from the lock-in period in real estate investments in special cases. As per rules, FDI in real estate has a lock-in period of three years before any foreign entity could exit investments in India.

However, it has to be seen which arm of Lehman Brothers has made real estate investments directly or indirectly. If that subsidiary has already filed for bankruptcy globally, regulators may allow an exemption from the lock-in period. However, sources said no Lehman subsidiary or related entity has applied for an exemption from the lock-in period yet.