We cannot disclose the names. But as I have said, we have exposure to 65% Indian firms and 35% overseas and all of them are investment grade. They are continuously rated by external global rating agencies. Beyond this, I cannot say much. They are structured deals and we are not supposed to reveal their names.
Why did ICICI Bank buy these credit derivatives in the first place? Is it to manage credit risk or are they stand-alone investments? Some analysts say you operate like a hedge fund and take too much risk.
Our banking balance sheet is $103 billion and the credit derivatives portfolio is $2.2 billion. Can you call us a hedge fund, based on 2% of our investment? The proportion is relevant.
We looked at these instruments as pure credit risk and was convinced that returns from structured deals would be higher than returns from loans to these companies. So, it was nothing but a lending decision, but in the form of a structure that offers better returns. In fact, that is why we have not been selling this portfolio. The underlying companies continue to remain good and they will pay us up over the four years when these papers mature. We are not in a hurry to sell them because of the notional mark-to-market losses. If we were operating like a hedge fund, we would have bought and sold, depending on the market conditions. That has not been the case.
Have the underlying assets also depreciated? Will you provide for them as well?
All underlying assets continue to be investment grade and their ratings are constantly been reviewed by the rating agencies. There is no credit quality deterioration.
A typical CDO is sold in three tranches according to risk and maturity—low risk, medium risk and high risk. Do you hold the riskiest tranches of the CDO in your books?
About $1.6 billion is credit swaps or credit-linked notes, the lowest risk category. We also have about $600 million collateralized debt obligation. They are of medium risk.
What is the risk management structure in ICICI Bank? Is it done in an integrated fashion from India?
First of all, we have a consolidated risk management policy across the bank. No individual subsidiary can dilute the policy and, in fact, they add additional safeguards to the policy, depending on the local regulations. These policies are then adopted by the individual boards of these subsidiaries.
Is the bank’s board the final decision maker on these investments? Where does the buck stop? At you, since you oversee the bank’s international operations?
These decisions are taken at the committee of directors level. The working directors are members of the committee. These decisions were contemplated and taken from 2005 onward, when we started our international operations. These are new concepts and large investments decisions on such issues are always taken by the committee of directors. So, the buck stops with the committee. Incidentally, I am no longer the head of international operations. I am the joint MD and CFO looking at all supervisory aspects.
I manage the risks and so you can say that the buck stops with me.
For higher returns, will you continue to invest in such papers?