The finance ministry has advised public sector lenders to steer clear of complex financial products and carry out their own due diligence before investing in overseas companies. The ministry’s direction follows the failure of top US financial institutions, which is likely to result in mark-to-market losses for Indian banks.
“The banks have been advised to follow very strictly the Reserve Bank of India (RBI) guidelines while taking overseas exposures. They have also been asked not to go by ratings assigned to (overseas) companies by rating agencies and instead carry out their own assessment,” a finance ministry official said.
Top Indian banks, including ICICI Bank and State Bank of India, have exposure to entities like Lehman Brothers, Freddie Mac and Fannie Mae, among others, the official said.
In the past, experts have blamed rating agencies for not capturing or ignoring the impact of the risk on the books of global financial institutions, some of which have been bailed out or gone for mergers, if not collapsed. The ministry has advised public sector banks to invest only in simple derivatives and understand the risks associated with the counter-party and financial instruments, a source said.
“We are constantly adjusting exposures to companies based on our internal risk management system,” said a senior executive of a public sector bank, which has booked a mark-to-market loss of a few crore rupees. The government’s concerns arising out of the financial market turmoil are natural as banks are dealing with public money, he added.
RBI is also monitoring the situation closely and may further tighten exposure norms in financial instruments if required. However, the official said there is no cause for any alarm as the government and the central bank are vigilant and the global financial turmoil will not have a major impact on Indian financial institutions.
The global financial turmoil has already put pressure on the Indian financial system, which is now facing a liquidity crunch due to a pull-out by foreign investors to meet financial obligations back home. As a result, the liquidity has tightened in the country and may slow down credit growth further.
