The proposed introduction of the credit default swaps (CDS) for corporate bonds by the Reserve Bank of India (RBI) may face difficulty in gaining momentum unless there is a large scale participation from the state-owned banks, which are typically averse to deal with any structured financial products.
Clearing Corporation of India (CCIL) senior vice-president Golaka Nath said, ?The current low key participation by the public sector banks in the existing derivative instrument like interest rate swaps indicate their reluctance in dealing with such derivative products.? CCIL is planning to develop CDS payment and settlement platform for corporate bonds.
The PSU banks, which own 70% of banking assets in India, should have a significant presence in order to develop a proper credit derivative market, analysts said.
According to CCIL data, PSU banks hold only 0.63% market share generating Rs 650 crore of business in the interest rate swap market (inclusive of buys and sells) while foreign banks hold 78.70% with Rs 81,218 crore volume. Interest rate swap is a hedging tool to mitigate interest rate related risks and a derivative where one stream of future interest payments is exchanged for another based on a specified principal amount.
In July 2010, RBI issued a draft report on the introduction of credit default swaps (CDS) for corporate bonds wherein it mentioned about CCIL being the payment and settlement platform for such product. Though RBI has not sent any official communique to CCIL in this regard, it is learnt that the latter has already started preliminary studies to serve the purpose.
?We have already started exploring options to develop the software platform. We may be planning large scale educational programmes to articulate the operational modes to trade in a CDS market,? said a CCIL official.
CDS, a credit derivative instrument, which assumed much significance especially after the recession, is a hedging tool to offset credit risk through swap contract. In this market, a party can transfer his credit risk to another. Some analysts say the probable reasons as to why PSBs don’t participate in credit derivative market has something to do about their risk taking ability.
?If a PSU bank incurs losses in derivative market due to a dealer’s wrong call, it is treated more of a criminal offense rather than a financial loss. Vigilance steps into action. This holistically brings down the risk taking ability of PSU bank dealers. However, in other banks (foreign or private) it is just treated as financial loss.? Referring to the low key participation in credit derivative market by PSBs , Ashutosh Khahjuria, head ? IDBI Bank, said, ?With relatively lower deposit and loan base, foreign banks have higher exposure on trading side to generate revenue. However, PSU banks’ most revenue come from the lending business as they have larger deposit and credit book.? The final guidelines on CDS market for corporate bonds is expected to be unveiled by March 2011. India will not delay the launch of a CDS market but will move carefully due to the risks associated with such derivatives, Shyamla Gopinath, RBI deputy governor had said.
