RBI to grant approval for Banks foreign branches for structured products

Now the foreign branches or subsidiaries of Indian banks that plan to deal in structured financial products will be required to get prior approval from the Reserve Bank of India (RBI). This measure has been taken with regard to regulate overseas operations of Indian banks.

RBI has also elucidated that banks that are dealing in simple financial products do not require taking prior approval. The central bank’s measure is proposed to regulate the activities of foreign branches or subsidiaries of Indian banks, which to date were mostly controlled by the host country’s regulations.

As per this move, known as cross-border supervision, will require foreign branches or subsidiaries to provide full particulars of these products, including their regulatory treatment involving capital adequacy, valuation, pricing, exposure norms and the like as prescribed by the host country’s regulator.

According to banking sources RBI has extended its control over products and activities of foreign branches and subsidiaries of Indian banks following the requirements made by the banks for their exposure to planned products in subprime-hit markets of the United States and the United Kingdom. Structured products are exotic derivatives products.

Following subprime crisis — which broke out due to high defaults on personal or home loans offered to less credit-worthy borrowers for higher returns — foreign branches of several public sector and private banks were forced to make provisions for their exposure to structured products, like credit-linked notes or credit derivatives.

Credit derivatives are means wherein the primary assets are loans or bonds. If the value of the underlying loan or bond decreases, it will affect the profitability of banks as banks need to make a provision for the loss in their books to the extent of the fall in the value of the underlying loan or bond.

However ICICI Bank has reported an exposure of $1.5 billion to credit derivatives, other banks with exposure to such products are State Bank of India ($1 billion), Bank of India ( $300 million) and Bank of Baroda ($150 million).

On the other hand Bank of Baroda has offered around Rs 242 crore for exposure to structured products overseas, Bank of India has set aside Rs 161 crore. Earlier during the quarter (July-September 2008), ICICI Bank had made a stipulation for around $78 million for the investment portfolio of its UK subsidiary, which resulted in the operations of the arm reporting a loss of $35 million.

In April this year RBI in its annual monetary policy had mentioned about the cross-border supervision to control operations of Indian bank’s foreign branches. At present, the Banking Regulation Act, 1949, is administering most of the banking activities in India, whereas the overseas operations are guided by the host country’s regulations. At the time of final audit of the banks RBI gets reports of overseas operations.