Indian banks through their overseas branches and subsidiaries have a combined exposure of around $1 billion to five troubled institutions - Wachovia, Washington Mutual, AIG, Fortis and Lehman Brothers.
Though the combined marked-to-market losses of the Indian banks were estimated at $450 million at the end of July this year, the Reserve Bank of India, which is monitoring the situation closely, believes that the losses are notional and will only arise if the counter-party does not pay.
"There is no reason to worry as four of the troubled institutions, barring Lehman, have been bailed out We are monitoring the impact on the spreads," RBI Deputy Governor V Leeladhar told Business Standard.
The banks do not have any direct sub-prime exposure. Some of the exposure is to collateralised debt obligation and credit default swaps. CDOs are complex derivatives that pool loans extended by banks, and the payment and returns are on the basis on risk categorisation. CDSs are loan default insurance packages.
According to data compiled by RBI, the MTM loss for public sector banks was estimated at $90 million, while for private banks it was around $360 million at the end of July.
Of the total exposure, around $330 million is to Lehman Brothers, which has filed for bankruptcy in the United States. The other institutions - Fortis, Washington Mutual, Wachovia and AIG - have either received a bailout from the government and the central bank or have been merged.
Leeladhar stressed that the total exposure and the MTM losses were both small, given the balance sheet size of Indian banks.
As for domestic transactions, Leeladhar said that RBI, in tandem with the Fixed Income Money Markets & Derivatives Association, had managed to get eight Indian banks, including a primary dealer, to successfully settle the exposure to Lehman's interest rate swaps. The notional amount involved was around Rs 60,000 crore (Rs 600 billion), and the net settlement amount was Rs 50 crore (Rs 500 million), which Lehman paid out.
As for the billion-dollar exposure overseas, ICICI Bank's exposure to the five troubled American and European institutions is estimated at $230 million. While ICICI Bank has no investment in Fannie Mae, Freddie Mac or Landsbanki of Iceland, it has exposure of a little over $100 million to Morgan Stanley, which has converted itself into a bank holding company.
ICICI Bank has said it has no direct exposure and the investment was made by its overseas subsidiaries. In the case of Lehman, ICICI Bank's UK subsidiary had exposure of around $80 million, against which there are provisions of $12 million. The bank has said that it may have to provide an additional $28 million, assuming 50 per cent recovery takes place.
In the past, the bank has said that its exposure to global paper was to the tune of $3 billion. Of this, around $600 million was in mortgage-backed securities and another $500 million in corporate bonds.