Indian Banks Combined Exposure to Sub Prime Over US$ 1 Billion

Post by sharat on January 6, 2009 · Under Banking, Indian Economy ·  

A report commissioned by the Reserve Bank of India (RBI) suggests that Indian banks have a combined exposure of over US$ 1 billion or Rs 4,800 crore to five troubled global financial institutions including Lehman Brothers and AIG.

Two private sector banks and ten state owned banks have a combined exposure of over US$1 billion or Rs 4,800 crore to, AIG, Washington Mutual, Lehman Brothers, Wachovia and Fortis. Of the US$ 1 billion plus exposure, US$ 445.60 million was fund based exposure. That is to say direct lending activities such as cash credit, and term loans. Whilst the other US$ 634.20 million was non fund based exposure, where the bank acts as a guarantor rather than lender, providing letters of credit or bank guarantees.

The RBI undertook a full assessment of the exposure of 37 major Indian banks to the failure or nationalisation of some major global financial institutions in the wake of the credit crisis on September 30th according to the Finance Ministry, who commissioned the study.

ICICI Bank disclosed had a US$ 80 million exposure to Lehman Brothers, through the ownership of Lehman Brothers senior debt. Other Indian banks with a significant international presence are State Bank of Indi, Bank of Baroda, and Punjab National Bank, though it is unknown whether any of these three feature in the list of 10 state owned banks the report suggests has exposure.

Exposures consisted mainly of derivative transactions, investments, nostro balances (balances a bank maintains with a foreign bank in a foreign currency), bank guarantees and foreign exchange exposure.

The credit derivatives mainly comprised credit default swaps, credit linked notes, collateralised debt obligations (CDO's), while other investments comprised asset-backed commercial papers and asset-backed securities.

A few banks did invest in CDO's and bonds which had underlying subprime assets. As a result, those banks suffered a mark-to-market loss caused by the widening of the credit spreads which occurred as a direct consequence of the effect of the subprime crisis on the term liquidity in the market. The central bank now monitors the credit derivative and other investment exposure of Indian banks and related mark-to-market losses on a monthly basis.