RBI seeks banks' overseas data

SUB-PRIME/ IMPACT

Crisis spreads from US to EUROPE.

The Reserve Bank of India (RBI) has sought details from Indian banks on the exposure to credit-linked derivative instruments by their overseas branches and subsidiaries.

The move is aimed at assessing the impact of sharp widening in credit spreads as a fallout of the turmoil in the US subprime mortgage market. Global investors' aversion to riskier assets has led to spreads on credit-linked notes and credit default swaps to widen by 500-700 basis points.

A rise in yields on these assets leads to valuation losses as they are marked-to-market in the books of the banks. Marked-to-market is the process of valuing the investments as per current market rates on a daily basis.

Some countries specify continuous valuation of such exposure along the market rates. However, the RBI has made it mandatory for Indian banks to Marked-to-market such exposure on consolidated basis. Investments by Indian banks in such derivatives is estimated to be in the region of $3-4 billion.

RBI has asked for details of exposure to such derivatives, including subprime. According to a banker, foreign branches and offices of Indian banks are primarily exposed to derivative products which have loans or bonds of Indian companies as underlying assets.

Tarun Bhatia, head of financial sector rating at Crisil, said: "The risk to Indian banks is not high since their exposure to local credit is limited and market investment of Indian banks are mostly in government and high grade paper."

ICICI Bank has total CDO exposure of Rs 6,000 crore. Of which, only Rs 1,600 crore ($400 million) is in derivative products overseas. The investments in derivative products have Indian corporate debt as underlying assets.

"We do not have any exposure to derivatives with retail assets as the underlying," said Vishakha Mulye, ICICI Bank's group chief financial officer.

The bank's investments in overseas derivatives products is only 0.5 per cent of its total assets and hence, the impact on its balance sheet would be negligible.

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UNDER THE SCANNER

The move is aimed at assessing impact of widening credit spreads as a fallout of the mortgage market turmoil

A rise in yields on these assets leads to valuation losses as they are marked-to-market

Investments by Indian banks in such derivatives is estimated to be in the region of $3-4 billion

Indian banks are primarily exposed to derivative products which have loans or bonds of domestic companies as underlying assets