RBI jittery about foreign banks' contingent liabilities

The Reserve Bank of India (RBI) has expressed concern over the rising contingent liabilities of foreign banks in India.

Contingent liabilities are essentially off-balance sheet items such as outstanding forward exchange contracts, guarantees, outstanding currency and interest rate swap contracts.

The derivative positions pose a concern as the regulator feels that the other party involved in such deals, be it a bank or corporate, may not be as risk savvy as the foreign bank, said a banker.

"Thus, if the interest rate or currency view turns adverse, the transaction runs into losses for the counterparties who end up paying much more than the real risk," he added.

Moreover, contingent liabilities created through derivatives may not be always the real liabilities of foreign banks and instead could be the underlying position which is getting hedged through the derivative deal. Therefore, the RBI has made it mandatory for banks to report their derivative positions regularly.

JP Morgan Chase Bank has the highest contingent liabilities, aggregating 67 times its asset book. Its off-balance sheet exposure stands at Rs 87,596 crore against total assets of just Rs 1,307 crore.

In terms of total quantum, Citibank's contingent liabilities stood the highest at Rs 1,89,589 crore in 2004-05.

This was five times the bank's total asset base of Rs 33,806 crore.

Bankers said the contingent liabilities of foreign banks is higher as they tend to go in for a higher fee-based income through a higher exposure to derivatives and other fee-based activities.

The limited capital base of foreign banks in India limits their ability to take larger fund-based positions.

The Reserve Bank of India (RBI) has asked banks to report derivative positions regularly as a fallout of the high off-balance sheet exposure.

Singapore's leading bank in India "" DBS Bank - has contingent liabilities of Rs 18,768 crore, which were 13 times the Rs 1,409 crore asset size of the bank.

Likewise, contingent liabilities of Societe General, Bank of America and American Express were on the higher side at 17 times, 16 times and 13 times respectively of their total assets.

Japanese banks, in contrast, have been quite conservative in taking off-balance sheet exposures. Bank of Tokyo-Mitsubishi had contingent liabilities of Rs 1,175 crore against an asset book size of Rs 1,135 crore.

The higher contingent liabilities of foreign banks has made the RBI and the government to have a relook at foreign banks' policy. Currently, only funded exposures are taken into account for calculating foreign banks' share in the banking industry.

The authorities are considering whether to include non-funded or fee-based exposure in calculating the total share of foreign banks in the banking sector.

This is because, if the non-funded exposure is taken into account, the share of foreign banks may have touched the 15 per cent cap, bankers pointed out.