Indian banks have an exposure of over $1 billion to the five troubled global financial institutions, including Lehman Brothers and AIG, according to an assessment done by the Reserve Bank of India.
Ten public sector banks and two private banks have an exposure of $1.08 billion to US financial majors Wachovia Corporation, Washington Mutual, AIG, Lehman Brothers and a European financial institution Fortis. About $445.60 million was fund-based exposure, while $634.20 million was non-fund based exposure.
Providing bank guarantee, letter of credit are known as non-fund based business, while lending activities like cash credit and term loan are classified as fund-based business.
In the light of recent developments relating to failure of some large financial institutions in the US and Europe, the RBI had undertaken an assessment of the exposure of 37 major Indian banks to these entities as on September 30, 2008, the finance ministry said.
The concerned Indian banks have made a provisioning of $47.30 million on these exposures. ICICI Bank had disclosed that its UK subsidiary had an exposure of $80 million in the senior bonds of Lehman Brothers.
Other banks, who have significant presence overseas, are State Bank of India, Bank of Baroda and Punjab National Bank.
It is not known whether these three banks figure in the list of 10 state-owned banks mentioned in the report.
The exposures mainly consisted of derivative transactions (notional principal), investments, nostro balances (balance a bank maintains with a foreign bank in foreign currency), bank guarantees and foreign exchange exposures.
The credit derivatives mainly comprised credit default swaps, credit linked notes, collateralised debt obligations, while other investments comprised asset-backed commercial papers and asset-backed securities.
A few banks had invested in the CDOs and bonds which had underlying entities with sub-prime exposures.
As a consequence, banks had suffered mark-to-market losses caused by the widening of the credit spreads due to adverse impact of the sub-prime crisis on the term liquidity in the market.
However, the additional provisioning requirements towards mark-to-market losses arising from a widening of the credit spreads were not significant for the banks compared with their balance sheet size and level of profits.
The central bank is monitoring the exposure of Indian banks towards credit derivatives and other investments and related mark-to-market losses on a monthly basis.