In order to minimise the risk arising from derivatives, guarantees and credit commitments, the Reserve Bank of India is mulling over regularising the provisions of exposure of Indian banks to the overseas market and specify risk management norms.

On the backdrop of prevailing global sub-prime crisis, the apex bank has sought the data regarding their exposure to foreign as well as domestic derivatives and currency markets and has also urged the banks to produce the procedure adopted by them for the portfolio valuation — marking to market — before the end of the 2008 financial year, sources revealed.

Derivative structures

The banks are asked about the details of international investment including credit derivative structures like credit-linked notes based on foreign currency loans and bonds raised by Indian companies abroad.  

According to the latest data released by RBI, the consolidated foreign claims or exposure of domestic banks on ultimate risk basis has increased by 41.16 per cent, from Rs 105,675 crore at the end of June 2006 to Rs 149,167 at the end June 2007.

The consolidated contingent exposure of Indian banks arising from derivatives, guarantees and credit commitments rose 79 per cent, 62.9 per cent and 101 per cent respectively.

Exposure of Indian banks to derivatives surged to Rs 13,999 crore at the end of June 2007 from Rs 7,818 crore at end of June 2006, guarantees to Rs 16,988 crore from Rs 10,424 crore and credit commitments to Rs 1,468 crore from Rs 729 crore for the same period, data released by the central bank said. The data reveals that about 54.3 per cent of the total foreign claims of Indian banks were concentrated in five countries including USA, UK, Singapore, Germany and United Arab Emirates.

Maximum exposure

Indian banks have the maximum exposure of 22.6 per cent in USA in these segments. International claims of Indian banks arising from guarantees and credit commitments were maximum in USA, 30.10 per cent and 52.7 per cent respectively, while in derivatives USA had a share of 15.1 per cent, the data pointed out. 

This increased exposure of banks to derivatives had prompted the Central Bank to seek data on this portfolio and a provision made for possible losses. The banking regulator is likely to introduce certain limitations for bank exposure to forex derivatives. The regulator might also specify risk management norms for the Indian banks to enter into derivatives.

The RBI has already asked the domestic banks to limit their capital market exposure to 40 per cent of their net worth, with direct exposure limited to 20 per cent.