BoB to make Rs10 cr provision for CLNs

BoB to make Rs10 cr provision for CLNs

BS Reporter / Mumbai March 6, 2008

Indian banks have started experiencing the ripples of the US subprime crisis. While ICICI Bank is provisioning an additional $70 million (around Rs 280 crore) to cover its losses on exposure to credit derivatives, Bank of Baroda today said it will provision an additional $2.50 million (around Rs 10 crore) for its investments in Credit Linked Notes (CLNs).

CLN is a form of credit derivative issued overseas for bonds floated by Indian companies. The total investment of the bank in CLNs was $330 million (around Rs 1,300 crore) at the end of December 2007.

The full provisioning has been made in accordance with prescribed norms of mark-to-market. The bank has already made provision of $2.8 million (around Rs 11 crore).

If these investments are marked to market as of February 29, 2008, there would be an additional provision of $2.50 million, as credit spreads have widened.

A credit spread is the difference in yield between two debt issues of similar maturity and duration. It may be quoted as a spread to a benchmark floating-rate index such as Libor, or as a spread to a highly-rated reference security such as a government security.

The credit spread is often used as a measure of relative creditworthiness, with reduction in the credit spread reflecting an improvement in the borrower